<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
For the quarterly period ended September 27, 1998 or
Transition report pursuant to section 13 or 15(d) of the
- --- Securities Exchange Act of 1934
For the transition period from _____________ to _______________
Commission file number 33-14051
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Koo Koo Roo Enterprises, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 33-0197361
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
18831 Von Karman Avenue, Irvine, California 92612
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (949) 757-7900
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
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Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
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As of November 9, 1998, the registrant had issued and outstanding 179,572,476
shares of common stock, $.01 par value per share.
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<PAGE>
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
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KOO KOO ROO ENTERPRISES, INC.
-----------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
($ in thousands, except share amounts)
<TABLE>
<CAPTION>
September 27, December 28,
1998 1997
-------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 18,787 $ 32,518
Bridge note receivable - KKR merger 3,064 0
Receivables 3,710 3,944
Inventories 4,196 4,569
Other current assets 3,748 4,086
--------- ---------
Total current assets 33,505 45,117
Property and equipment, net 180,347 183,601
Reorganization value in excess of amount allocable to identifiable assets, net 35,479 36,529
Other assets 24,758 24,521
--------- ---------
$ 274,089 $ 289,768
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
Current liabilities:
Current portion of long-term debt, including capitalized lease obligations $ 2,380 $ 2,694
Accounts payable 13,454 13,959
Self-insurance reserves 28,701 32,515
Other accrued liabilities 53,582 58,573
Income taxes payable 3,730 3,788
--------- ---------
Total current liabilities 101,847 111,529
Other long-term liabilities 4,555 4,478
Long-term debt, including capitalized lease obligations, less current portion 215,775 199,955
Stockholders' deficit:
Common stock - authorized 1,500,000 shares, par value $.01 per share,
997,277 shares issued 10 10
Additional paid-in capital 157,317 157,317
Accumulated deficit (204,032) (182,138)
Less treasury stock, at cost (8,992 shares) (1,383) (1,383)
--------- ---------
Total stockholders' deficit (48,088) (26,194)
--------- ---------
$ 274,089 $ 289,768
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements
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<PAGE>
KOO KOO ROO ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
($ in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the Quarters Ended
--------------------------------
September 27, September 28,
1998 1997
------------- -------------
<S> <C> <C>
Sales $115,293 $116,585
----------- -----------
Product costs 30,492 30,774
Payroll and related costs 40,941 41,081
Occupancy and other operating expenses 30,416 32,653
Depreciation and amortization 5,586 5,533
General and administrative expenses 7,683 7,395
Opening costs 1,103 51
Loss on disposition of properties, net 1,835 313
----------- -----------
Total costs and expenses 118,056 117,800
----------- -----------
Operating loss (2,763) (1,215)
Interest expense, net 6,111 5,002
----------- -----------
Loss before income tax provision (8,874) (6,217)
Income tax provision 46 30
----------- -----------
Net loss $ (8,920) $ (6,247)
=========== ===========
Net loss per share -
basic and diluted $ (.07) $ (.05)
=========== ===========
Weighted average shares
outstanding - basic and diluted 121,515,391 121,515,391
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
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<PAGE>
KOO KOO ROO ENTERPRISES, INC.
-----------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
($ in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
----------------------------------
September 27, September 28,
1998 1997
------------- -------------
<S> <C> <C>
Sales $ 348,694 $ 354,666
----------- -----------
Product costs 93,288 93,905
Payroll and related costs 122,859 124,451
Occupancy and other operating expenses 92,595 99,077
Depreciation and amortization 16,208 16,714
General and administrative expenses 21,799 21,837
Opening costs 2,361 54
Loss on disposition of properties, net 3,241 2,190
Impairment of long-lived assets 0 2,640
----------- -----------
Total costs and expenses 352,351 360,868
----------- -----------
Operating loss (3,657) (6,202)
Interest expense, net 17,937 13,964
----------- -----------
Loss before income tax provision (21,594) (20,166)
Income tax provision 300 382
----------- -----------
Net loss $ (21,894) $ (20,548)
=========== ===========
Net loss per share -
basic and diluted $ (.18) $ (.17)
=========== ===========
Weighted average shares
outstanding - basic and
diluted 121,515,391 121,515,391
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
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<PAGE>
KOO KOO ROO ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
---------------------------------
September 27, September 28,
1998 1997
------------- --------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Cash received from customers, franchisees and licensees $ 350,267 $ 355,962
Cash paid to suppliers and employees (336,863) (352,738)
Interest paid, net (14,320) (14,340)
Opening costs (2,017) 0
Income taxes paid (358) (197)
--------- ---------
Net cash used in operating activities (3,291) (11,313)
--------- ---------
Cash flows from investing activities:
Proceeds from disposal of property and equipment 4,585 225
Bridge note receivable - KKR merger (3,000) 0
KKR merger costs (1,271) 0
Capital expenditures (17,703) (8,560)
Mandatory lease buyback, net 0 (2,690)
Lease termination payments (1,115) (2,761)
Opening costs 0 (145)
Other (570) (1,999)
--------- ---------
Net cash used in investing activities (19,074) (15,930)
--------- ---------
Cash flows from financing activities:
Reductions of long-term debt, including capitalized lease obligations (2,889) (2,315)
Net proceeds from issuance of notes 11,620 33,947
Payment of debt issuance costs (97) (2,696)
--------- ---------
Net cash provided by financing activities 8,634 28,936
--------- ---------
Net increase (decrease) in cash and cash equivalents (13,731) 1,693
Cash and cash equivalents at beginning of period 32,518 33,820
--------- ---------
Cash and cash equivalents at end of period $ 18,787 $ 35,513
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements
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<PAGE>
KOO KOO ROO ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
($ in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
---------------------------------
September 27, September 28,
1998 1997
-------------- --------------
<S> <C> <C>
Reconciliation of net loss to net cash used in operating activities:
Net loss $ (21,894) $ (20,548)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 16,208 16,768
Amortization of debt issuance costs 896 792
Expense of unamortized opening costs 344 0
Loss on disposition of properties 3,241 2,190
Impairment of long-lived assets 0 2,640
Accretion of interest 6,066 1,295
Decrease in receivables, inventories and other current assets 601 1,025
Decrease in accounts payable, self-insurance reserves, other accrued
liabilities and income taxes payable (8,753) (15,475)
----------- -----------
Net cash used in operating activities $ (3,291) $ (11,313)
=========== ===========
</TABLE>
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<PAGE>
KOO KOO ROO ENTERPRISES, INC.
-----------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
1. Company. Koo Koo Roo Enterprises, Inc. (formerly known as Family
-------
Restaurants, Inc.) (together with its subsidiaries, the "Company") was
incorporated in Delaware in 1986 and is primarily engaged in the operation of
restaurants in the full-service and fast-casual segments, through its
subsidiaries. Information relating to periods ending on or prior to September
27, 1998 included herein relates to the historical operations of Family
Restaurants, Inc. and, except as otherwise indicated, does not reflect the
operations of Koo Koo Roo, Inc., a Delaware corporation ("KKR"), which the
Company acquired in the Merger (as defined below, see Note 5) on October 30,
1998. At September 27, 1998, the Company operated 266 restaurants in 29 states,
with approximately 61% of its restaurants located in California, Ohio,
Pennsylvania, Indiana and Michigan. Additionally, as of September 27, 1998, the
Company was the franchisor and licensor of 20 restaurants outside the United
States. As a result of the Merger, as of November 9, 1998, the Company operated
313 restaurants in 28 states.
2. Financial Statements. The Condensed Consolidated Financial Statements
--------------------
in this Form 10-Q have been prepared in accordance with Securities and Exchange
Commission Regulation S-X. Reference is made to the Notes to the Consolidated
Financial Statements for the Year Ended December 28, 1997 included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1997
(the "Form 10-K") for information with respect to the Company's significant
accounting and financial reporting policies, as well as other pertinent
information. The Company believes that all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the results
of the interim periods presented have been made. The results of operations for
the quarter and nine months ended September 27, 1998 are not necessarily
indicative of those for the full year.
3. Long-Term Debt. On August 12, 1997, FRI-MRD Corporation (a wholly-
--------------
owned subsidiary of the Company) ("FRI-MRD") issued new senior discount notes
(the "Senior Discount Notes") in an aggregate face amount of $61 million at a
price of approximately 75% of par. The Senior Discount Notes are due on January
24, 2002. Interest on the Senior Discount Notes accretes at a rate of 15% per
annum until July 31, 1999 and, thereafter, is payable in cash semi-annually at
the rate of 15% per annum. The $61 million of Senior Discount Notes were issued
to certain existing holders of the Company's 9-3/4% Senior Notes due 2002 (the
"Senior Notes") in exchange for $15.6 million of Senior Notes plus approximately
$34 million of cash under an agreement pursuant to which FRI-MRD had the ability
to issue up to a maximum of $75 million aggregate face amount of Senior Discount
Notes. The gain of $3,548,000 realized on the exchange of Senior Notes has been
deferred and classified as an element of long-term debt in accordance with the
guidelines of Emerging Issues Task Force Issue No. 96-19 because the present
value of the cash flows of the Senior Discount Notes was not at least 10%
different from the present value of the cash flows of the Senior Notes
exchanged. The deferred gain is being amortized as a reduction of interest
expense over the life of the Senior Discount Notes. On January 14 and 15, 1998,
FRI-MRD issued the remaining $14 million aggregate face amount of the Senior
Discount Notes available under such agreement to the same purchasers at a price
of 83% of par. FRI-MRD received approximately $11.6 million in cash as a
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<PAGE>
result of this subsequent sale. Proceeds from the sales of the Senior Discount
Notes have been and will continue to be used to fund the Company's capital
expenditure programs and for general corporate purposes.
4. Opening Costs. Opening costs are incurred in connection with the
-------------
opening or remodeling of a restaurant and are principally related to stocking
the restaurant and training its staff. Through the year ended December 28, 1997,
the Company's policy had been to capitalize such opening costs and amortize them
over one year. In April 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the
Costs of Start-Up Activities," which specifies that all costs of start-up
activities, including restaurant opening costs, should be expensed as incurred.
Although SOP 98-5 is effective for fiscal years beginning after December 15,
1998, early adoption is allowed, and the Company elected to adopt the provisions
of SOP 98-5 in the quarter ended March 29, 1998.
Accordingly, $344,000 of unamortized opening costs at December 28, 1997
(classified as other current assets) was expensed in the condensed consolidated
statement of operations for the quarter ended March 29, 1998. Opening costs
incurred during the quarter and nine months ended September 27, 1998 were
$1,103,000 and $2,017,000, respectively. Amortization of opening costs of
$51,000 and $54,000 in the comparable periods of 1997 has been reclassified.
5. Subsequent Event - KKR Merger. On October 30, 1998, the Company, FRI-
-----------------------------
Sub, Inc., a Delaware corporation and wholly owned subsidiary of FRI-MRD (the
"Merger Sub"), and KKR consummated their merger (the "Merger"), pursuant to an
Agreement and Plan of Merger, dated as of June 9, 1998 (the "Merger Agreement").
In the Merger, Merger Sub was merged with and into KKR, with KKR as the
surviving corporation.
As a result of the Merger, each outstanding share of common stock, $.01 par
value, of KKR was converted into the right to receive one share of common stock,
par value $0.01 per share, of the Company (the "Company Common Stock").
Immediately prior to the Merger, a stock dividend was declared whereby
approximately 121.96 shares of Company Common Stock were distributed for each
share of Company Common Stock outstanding immediately prior to the Merger. In
connection with the signing of the Merger Agreement, FRI-MRD provided a $3.0
million loan (the "Bridge Loan") to a subsidiary of KKR. Additionally, in
connection with the Merger, FRI-MRD issued $24 million aggregate face amount of
new senior secured discount notes (the "New MRD Notes") pursuant to the Senior
Secured Discount Note Agreement dated June 9, 1998 for net proceeds of $21.7
million and the Company expanded the Foothill Credit Facility (as defined below)
by an additional $20.0 million. The proceeds from the sale of the New MRD Notes
were used to acquire all of the outstanding capital stock of The Hamlet Group,
Inc. ("Hamlet") immediately prior to the consummation of the Merger (the "Hamlet
Acquisition"). The Merger and the Hamlet Acquisition will be accounted for as a
purchase.
The following table presents certain summary unaudited pro forma combined
financial information for the Company, assuming the Merger occurred as of the
beginning of fiscal 1997 for the periods presented or on the date indicated. The
unaudited pro forma combined financial information does not reflect certain cost
savings that management believes may be realized following the Merger. The
unaudited pro forma combined financial information is not indicative of the
results of operations or financial position of the combined companies that would
have occurred had the Merger occurred at the beginning of the periods presented
or on the date indicated, nor is it indicative of future operating results or
financial position. The unaudited pro forma adjustments are based upon currently
available
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<PAGE>
information and certain assumptions that management believes are reasonable
under the circumstances.
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
---------------------- --------------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1998 1997 1998 1997
---------- ---------- ---------- -----------
(Pro Forma)
Combined Statements of Operations
Information (Amounts in thousands,
except per share data)
<S> <C> <C> <C> <C>
Sales $137,536 $137,176 $416,003 $402,430
Operating loss (4,519) (9,525) (20,343) (20,270)
Interest expense, net 6,973 5,682 20,399 15,938
Net loss (11,307) (15,229) (40,554) (36,663)
Pro forma basic and diluted loss
per common share $ (.06) $ (.08) $ (.23) $ (.20)
Pro forma weighted average number
of common shares outstanding 179,572 179,572 179,572 179,572
</TABLE>
<TABLE>
<CAPTION>
Sept. 27,
1998
----------
(Pro Forma)
Combined Balance Sheet
Information (Amounts in thousands)
<S> <C>
Total assets $375,432
Total long-term debt and capitalized
lease obligations 240,694
Stockholder's equity 14,912
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ Results of Operations
Certain information and statements included in this Management's Discussion
and Analysis of Financial Condition and Results of Operations, including,
without limitation, statements containing the words "believes," "anticipates,"
"expects" and words of similar import, constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 and
involve known and unknown risks and uncertainties that could result in actual
results of the Company or the restaurant industry differing materially from
expected results expressed or implied by such forward-looking statements.
Although it is not possible to itemize all of the factors and specific events
that could affect the outlook of a restaurant company operating in a competitive
environment, factors that could significantly impact expected results include
(i) the development of successful marketing strategies for the Company's
restaurants, (ii) the effect of national and regional economic conditions, (iii)
the availability of adequate working capital, (iv) competitive products and
pricing, (v) changes in legislation, (vi) demographic changes, (vii) the ability
to attract and retain qualified personnel, (viii) changes in business strategy
or development plans, (ix) business disruptions, (x) changes in consumer
preferences, tastes and eating habits, (xi) increases in food and labor costs
and (xii) potential difficulties in combining the operations of KKR with the
Company. The Company
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<PAGE>
disclaims any obligation to update any such factors or to publicly announce the
result of any revisions to any of the forward-looking statements contained
herein to reflect future events or developments.
On October 30, 1998, the Company, Merger Sub and KKR consummated the
Merger, pursuant to the Merger Agreement. In the Merger, Merger Sub was merged
with and into KKR, with KKR as the surviving corporation.
As a result of the Merger, each outstanding share of common stock, $.01 par
value, of KKR was converted into the right to receive one share of Company
Common Stock. Immediately prior to the Merger, a stock dividend was declared
whereby approximately 121.96 shares of Company Common Stock were distributed for
each share of Company Common Stock outstanding immediately prior to the Merger.
In connection with the signing of the Merger Agreement, FRI-MRD provided the
Bridge Loan to a subsidiary of KKR. Additionally, in connection with the Merger,
FRI-MRD issued the New MRD Notes pursuant to the Senior Secured Discount Note
Agreement dated June 9, 1998 for net proceeds of $21.7 million and the Company
expanded the Foothill Credit Facility by an additional $20.0 million. The
proceeds from the sale of the New MRD Notes were used to complete the Hamlet
Acquisition immediately prior to the consummation of the Merger.
The following should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" presented in the
Form 10-K. Information relating to periods ending on or prior to September 27,
1998 included herein relates to the historical operations of Family Restaurants,
Inc. and, except as otherwise indicated, does not reflect the operations of KKR,
which the Company acquired on October 30, 1998. See Note 5 of the unaudited
condensed consolidated financial statements included elsewhere herein.
As used herein, "comparable restaurants" means restaurants operated by the
Company on January 1, 1997 and that continued in operation through the end of
the third quarter of 1998.
Liquidity and Capital Resources
- -------------------------------
A. Liquidity
The Company reported net cash used in operating activities for the nine
months ended September 27, 1998 and September 28, 1997. Cash needs are being
funded by available cash balances, supplemented, as necessary, by working
capital advances available under the Foothill Credit Facility (as defined
below). In addition, through November 9, 1998, FRI-MRD has raised approximately
$67.3 million in cash from the issuance of the Senior Discount Notes and the New
MRD Notes to supplement its cash needs. The Company's viability has been and
will continue to be dependent upon its ability to generate sufficient cash flow
to meet its obligations on a timely basis, and to comply with the terms of its
financing agreements.
Statement of Cash Flows. For the first nine months of 1998, net cash used
in operating activities was $3.3 million compared to $11.3 million for the same
period in 1997. The difference in cash received from customers, franchisees and
licensees as compared to cash paid to suppliers and employees improved by $10.2
million from 1997 to 1998 which more than offset cash paid for opening costs of
$2.0 million in 1998. For the first nine months of 1998, net cash used in
investing activities was $19.1 million compared to $15.9 million for the same
period in 1997. The increase in net cash used in investing activities of $3.1
million was due to the $3.0 million bridge loan related to
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<PAGE>
the Merger, Merger costs of $1.3 million and an increase in capital expenditures
of $9.1 million which more than offset decreases in mandatory lease buyback of
$2.7 million, lease termination payments of $1.6 million and an increase in
proceeds from disposal of property and equipment of $4.4 million. For the first
nine months of 1998, net cash provided by financing activities was $8.6 million
compared to $28.9 million for the same period in 1997. During 1998, $11.6
million in net proceeds from the issuance of notes was received compared to
$33.9 million in 1997, while payment of debt issuance costs decreased $2.6
million from 1997.
EBITDA. For the first nine months of 1998, the Company reported EBITDA
(defined as earnings (loss) before opening costs, gain (loss) on disposition of
properties, provision for divestitures and write-down of long-lived assets,
restructuring costs, interest, taxes, depreciation and amortization) of $18.2
million, compared to $15.4 million for the same period in 1997. The $2.8
million improvement was primarily due to the continuing impact of El Torito and
Chi-Chi's cost reduction and reengineering strategies, which have improved
operating margins. This improved EBITDA is the continuation of the trend that
began in 1996 when new management was installed at both El Torito and Chi-Chi's.
Since 1995, the divisional EBITDA of the Company's ongoing operations is set
forth in the following table.
<TABLE>
<CAPTION>
Divisional EBITDA
----------------------
Fiscal Year Ended El Torito Chi-Chi's
------------------------ --------- ----------
($ in thousands)
<S> <C> <C>
December 31, 1995 (a) $13,508 $(10,455)
December 29, 1996 11,956 (4,278)
December 28, 1997 17,627 36
</TABLE>
(a) Includes 53 weeks of operations and, in accordance with
Company policy at that time, excludes certain unallocated
corporate overhead.
The Company has included information concerning EBITDA herein because it
understands that such information is used by certain investors as one measure of
an issuer's historical ability to service debt. EBITDA should not be considered
as an alternative to, or more meaningful than, operating income (loss) as an
indicator of operating performance or to cash flows from operating activities as
a measure of liquidity. Furthermore, other companies may compute EBITDA
differently, and therefore, EBITDA amounts among companies may not be
comparable.
Working Capital Deficiency. The Company operates with a substantial
working capital deficiency because (i) restaurant operations are conducted
primarily on a cash (and cash equivalent) basis with a low level of accounts
receivable, (ii) rapid turnover allows a limited investment in inventories and
(iii) cash from sales is usually received before related accounts payable for
food, beverages and supplies become due. The Company had a working capital
deficiency of $68.3 million on September 27, 1998.
Credit Facility. In connection with the Merger, the Company has increased
its credit facility with Foothill Capital Corporation (the "Foothill Credit
Facility") to $55 million to provide for the ongoing working capital needs of
the Company. The Foothill Credit Facility now provides for up to
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<PAGE>
$35 million in revolving cash borrowings and up to $55 million in letters of
credit (less the outstanding amount of revolving cash borrowings). The Foothill
Credit Facility is secured by substantially all of the real and personal
property of the Company, contains customary restrictive covenants, including the
maintenance of certain financial ratios, and expires on January 10, 2002. The
Company is in compliance with all financial ratios for the quarter ended
September 27, 1998. Letters of credit are issued under the Foothill Credit
Facility primarily to provide security for future amounts payable under the
Company's workers' compensation insurance program ($13.1 million of such letters
of credit were outstanding as of November 9, 1998). No revolving cash borrowings
were outstanding as of November 9, 1998.
To increase its credit facility as discussed above, on June 9, 1998, the
Company entered into an amendment to the Foothill Credit Facility. The
amendment permitted, among other things, (i) an increase in the amount of
borrowings available under the Foothill Credit Facility from $35.0 million to
$55.0 million, (ii) the issuance of the New MRD Notes and (iii) the consummation
of the Hamlet Acquisition and the Merger. The additional borrowings under the
Foothill Credit Facility only became available after the consummation of the
Hamlet Acquisition and the Merger and then only on a pro rata basis as each
mortgage on the real property securing the Foothill Credit Facility is amended
to reflect the increase in the maximum amount. In connection with the execution
of the amendment, Foothill earned a consent fee in the amount of $100,000 and a
line increase fee of $500,000.
Senior Discount Notes. On August 12, 1997, FRI-MRD issued an aggregate
principal amount of $61 million of its Senior Discount Notes to certain holders
of the Company's Senior Notes in exchange for $15.6 million of Senior Notes plus
approximately $34 million of cash. On January 14 and 15, 1998, FRI-MRD issued
an additional $14 million aggregate principal amount of its Senior Discount
Notes to the same purchasers for approximately $11.6 million in cash. Proceeds
from the sales of the Senior Discount Notes have been and will continue to be
used to fund the Company's capital expenditure programs and for general
corporate purposes.
On June 9, 1998, FRI-MRD and the holders of the existing Senior Discount
Notes entered into an amendment to the Note Agreement governing the Senior
Discount Notes. Pursuant to the amendment, upon the closing of the Merger, the
Senior Discount Notes were amended to, among other things, permit (i) the
issuance of the New MRD Notes, (ii) the consummation of the Hamlet Acquisition
and the Merger and (iii) an increase in the amount of borrowings available under
the Foothill Credit Facility by up to $20.0 million.
Senior Secured Discount Notes. On June 9, 1998, FRI-MRD entered into a
Note Agreement pursuant to which FRI-MRD issued $24.0 million aggregate face
amount of New MRD Notes at a price of approximately 90% of par resulting in net
proceeds of $21.7 million. The New MRD Notes are due on January 24, 2002. No
interest is payable on the New MRD Notes until July 31, 1999, at which time
interest will be payable in cash semi-annually at the rate of 14% per annum with
the first cash interest payment due on January 31, 2000. The New MRD Notes are
redeemable by FRI-MRD, in whole or in part, on or before January 23, 2001, at a
price of 105% of the accreted value thereof, or after January 23, 2001, at a
price of 102.5% of the accreted value thereof. The New MRD Notes contain
covenants that restrict FRI-MRD, including limitations on (i) the incurrence of
certain indebtedness and liens, (ii) the ability to make certain restricted
payments, (iii) certain mergers, consolidations and asset sales, (iv) certain
transactions with affiliates and (v) the issuance of any
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<PAGE>
equity securities of Hamlet. Proceeds from the sale of the New MRD Notes were
used exclusively to purchase, and thereafter are secured by, all of the
outstanding shares of Hamlet.
The Company continues to be highly leveraged and has significant debt
service requirements. Although management believes that its current sources of
cash should be sufficient to meet its operating and debt service requirements
for the foreseeable future, there can be no assurance that the Company will be
able to repay or refinance its Senior Notes and its 10-7/8% Senior Subordinated
Discount Notes due 2004, or that FRI-MRD will be able to repay or refinance the
Senior Discount Notes or the New MRD Notes, at their respective maturities. The
Company continues to consider additional sources of cash, such as the sale of
non-core assets.
B. Capital Expenditures
Net cash used in investing activities was $19.1 million for the first nine
months of 1998, including $17.7 million for capital expenditures, as compared to
net cash used in investing activities of $15.9 million for the same period in
1997.
Capital expenditures of up to approximately $28 million are now anticipated
for fiscal 1998, including approximately $6 million devoted to normal
improvements of the Company's restaurants. The Company is continuing its
remodeling of both El Torito and Chi-Chi's restaurants and anticipates spending
approximately $13 million to $14 million for this purpose in fiscal 1998. In
fiscal 1998, the Company also plans to open two new El Torito restaurants,
including an El Torito Grill in Mission Viejo, California and its newly
developed quick-service casual-style restaurant, "El Torito Express Grill,"
which opened on July 6, 1998 in Pasadena, California. The Company also plans to
upgrade El Torito's in-store Point-of-Sale ("POS") technology beginning in late
fiscal 1998 and continuing into fiscal 1999.
By November 9, 1998, the Company had completed the remodeling of 20
additional El Torito restaurants, primarily in the Los Angeles/Orange County and
Sacramento markets, and 34 additional Chi-Chi's restaurants in various markets
(including four restaurants that are testing an enhanced remodel package) in
1998. The Company has announced plans for an aggressive remodel program for the
Chi-Chi's chain over the fiscal 1998 to fiscal 2000 period. This program could
cost up to $50 million.
Year 2000
- ---------
Background. In the past, many computers, software programs, and other
information technology ("IT systems"), as well as other equipment relying on
microprocessors or similar circuitry ("non-IT systems"), were written or
designed using two digits, rather than four, to define the applicable year. As
a result, date-sensitive systems (both IT systems and non-IT systems) may
recognize a date identified with "00" as the year 1900, rather than the year
2000. This is generally described as the Year 2000 issue. If this situation
occurs, the potential exists for system failures or miscalculations, which could
impact business operations.
The Securities and Exchange Commission ("SEC") has asked public companies
to disclose four general types of information related to Year 2000 preparedness:
the company's state of
-13-
<PAGE>
readiness, costs (historical and prospective), risks and contingency plans. See
SEC Release No. 33-7558 (July 29, 1998). Accordingly, the Company has included
the following discussion in this report, in addition to the Year 2000
disclosures previously filed with the SEC.
State of Readiness. The Company began a concerted effort to address its
Year 2000 issues in fiscal 1997. In fiscal 1998, the Company formalized the
effort with a team that includes the Chief Executive Officer, General Counsel,
Chief Financial Officer and Vice President of Information Services. This team
decided in early 1998 that the Company's best course of action was to replace
the IT systems that were not Year 2000 compliant with new hardware and software.
In addition to improving processes and allowing wider access to data, the new
systems would be Year 2000 compliant.
The Company believes that it has identified all significant IT Systems that
require replacement in connection with Year 2000 issues. Internal resources
have been used, and are continuing to be used, to make the required changes and
test Year 2000 readiness. The required modifications of all significant systems
are well underway. The Company plans on completing the replacement and testing
of all significant systems by September 1999. The Company is in the process of
identifying all non-IT systems that require replacement or update. Non-IT
systems that may have a significant impact on the Company are expected to be
replaced or updated by September 1999.
In addition, the Company has communicated with suppliers, banks, vendors
and others with whom it does significant business (collectively, its "business
partners") to determine their Year 2000 readiness and the extent to which the
Company is vulnerable to any other organization's Year 2000 issues. Based on
these communications and related responses, the Company is monitoring the Year
2000 preparations and state of readiness of its business partners. Although the
Company is not aware of any significant Year 2000 problems with its business
partners, there can be no guarantee that the systems of other organizations on
which the Company's systems rely will be converted in a timely manner, or that a
failure to convert by another organization, or a conversion that is incompatible
with the Company's systems, would not have a material adverse effect on the
Company.
Costs. The total cost to the Company of Year 2000 activities has not been
and is not anticipated to be material to its financial position or results of
operations in any given year. The Company expects to spend approximately $1.6
million on the new software and related hardware and installation costs in 1998,
approximately $1.2 million of which has been spent through September 27, 1998.
In addition, the El Torito in-store POS upgrade discussed in Capital
Expenditures above and POS upgrades in the Company's other operating divisions,
including KKR, which are required for Year 2000 compliancy, are expected to be
completed by September 1999 at a cost of approximately $6.0 million to $6.5
million, the majority of which is anticipated to be lease financed. These
costs, as well as the date on which the Company plans to complete the Year 2000
modifications and testing processes, are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third-party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved, and actual results could differ from those estimates.
Risks. The Company utilizes IT systems and non-IT systems in many aspects
of its business. Year 2000 problems in some of the Company' systems could
possibly disrupt operations at some
-14-
<PAGE>
restaurants, but the Company does not expect that any such disruption would have
a material adverse impact on the Company's operating results.
The Company is also exposed to the risk that one or more of its suppliers
or vendors could experience Year 2000 problems that could impact the ability of
such suppliers or vendors to provide goods and services. Although this risk is
lessened by the availability of alternative suppliers, the disruption of certain
services, such as utilities, could, depending upon the extent of the disruption,
potentially have a material adverse impact on the Company's operations.
Contingency Plans. Based on the above-described plans, the Company does
not believe that significant contingency plans will be necessary but as 1999
unfolds, the Company will begin preparing plans to deal with the possibility
that some suppliers or vendors might fail to provide goods and services on a
timely basis as a result of Year 2000 problems. The Company expects these
contingency plans will generally include the identification, acquisition and/or
preparation of backup systems, suppliers and vendors.
Results of Operations.
- ---------------------
The Company's total sales of $115,293,000 for the third quarter of 1998
decreased by $1,292,000 or 1.1% as compared to the same period in 1997. For the
first nine months of 1998, total Company sales of $348,694,000 decreased by
$5,972,000 or 1.7% as compared to the same period in 1997. As shown below,
these decreases were due to restaurants divested or closed in 1997 and 1998,
partially offset by increases in sales of comparable restaurants.
<TABLE>
<CAPTION>
Third Quarter First Nine Months
Sales Decrease Sales Decrease
-------------- -----------------
($ in thousands)
<S> <C> <C>
Decrease in Sales of Restaurants Divested or
Closed $(3,218) $(7,298)
Increase in Sales of Comparable Restaurants 1,926 1,326
------- -------
Total $(1,292) $(5,972)
======= =======
</TABLE>
Sales for comparable restaurants of $113,495,000 for the third quarter of
1998 increased by $1,926,000 or 1.7% as compared to the same period in 1997.
For the first nine months of 1998, sales of comparable restaurants of
$345,024,000 increased by $1,326,000 or 0.4% as compared to the same period in
1997. As shown below, these increases were primarily due to increased sales for
comparable Chi-Chi's restaurants in both the quarter and nine month periods.
Overall comparable sales results continue to reflect a competitive operating
environment for restaurants.
-15-
<PAGE>
<TABLE>
<CAPTION>
Third Quarter First Nine Months
Sales Increase Sales Increase
------------------ ----------------------
Amount Percent Amount Percent
-------- -------- -------- -----------
($ in thousands)
<S> <C> <C> <C> <C>
Comparable Chi-Chi's $1,853 3.1% $1,720 0.9%
Comparable El Torito 73 0.1 (394) (0.2)
------ ------
Total $1,926 1.7% $1,326 0.4%
====== ==== ====== ====
</TABLE>
El Torito comparable sales in the third quarter were basically flat (up
0.1%) as compared to the same period in 1997. In the third quarter, El Torito
suspended the use of electronic media for advertising, opting to reach targeted
customers utilizing alternative media strategies. In an effort to increase the
frequency of existing guests, El Torito introduced a series of two bounce back
programs in the third quarter, the Mystery Bounce Back Program and the "Tic-
Tac-2-Mexico" program. Both programs were designed to attract existing guests
to visit more frequently during a specified time period by offering the chance
to win cash prizes, discounts and free food. Additionally, the "Tic-Tac-2-
Mexico" program was tailored to build guest traffic during specific day parts.
The promotional focus for the quarter was fajitas which included the
introduction of four new types of fajitas as Chef's Specials.
Comparable sales for Chi-Chi's were up 3.1% in the third quarter of 1998 as
compared to the same period in 1997. July began with the media-supported
introduction of Chi-Chi's "Sizzling Sensation" campaign featuring the new
Grilled Steak & Chicken Tower and other items such as the Sizzling Enchiladas
and the new Sizzling Burrito and Sizzling Chimichanga. A free-standing insert
extended the campaign through mid-September and included special discount offers
for all times of the day to boost sales during the historic back-to-school sales
lull. Also contributing to Chi-Chi's improving comparable sales trends are the
favorable results of the remodel program begun in 1997. Since the inception of
the program, Chi-Chi's has remodeled 45 restaurants, five of which incorporated
an enhanced, more extensive version of the original remodel concept.
Product costs of $30,492,000 for the third quarter of 1998 decreased by
$282,000 or 0.9% as compared to the same period in 1997. For the first nine
months of 1998, product costs of $93,288,000 decreased by $617,000 or 0.7% as
compared to the same period in 1997. The decreases are due to the impact of the
16 restaurants sold or closed since the beginning of 1997. As a percentage of
sales, product costs remained flat at 26.4% in the third quarter of 1998 as
compared to the same period of 1997 and increased to 26.8% for the first nine
months of 1998 as compared to 26.5% in the same period of 1997.
Payroll and related costs of $40,941,000 for the third quarter of 1998
decreased by $140,000 or 0.3% as compared to the same period in 1997. For the
first nine months of 1998, payroll and related costs of $122,859,000 decreased
by $1,592,000 or 1.3% as compared to the same period of 1997. The decreases are
due to the impact of the 16 restaurants sold or closed since the beginning of
1997. As a percentage of sales, payroll and related costs increased to 35.5% in
the third quarter of 1998 as compared to 35.2% in the same period of 1997 and
increased to 35.2% for the first nine
-16-
<PAGE>
months of 1998 as compared to 35.1% in the same period of 1997. Savings realized
from the El Torito and Chi-Chi's cost reduction strategies which have focused on
improving labor scheduling and efficiencies have been offset by the impact of
the minimum wage increases nationally on September 1, 1997, and on March 1, 1997
and March 1, 1998 in California.
The Company is subject to Federal and state laws governing matters such as
minimum wages, overtime and other working conditions. Following the Merger,
approximately half of the Company's employees are paid at rates related to the
minimum wage. Therefore, increases in the minimum wage or decreases in the
allowable tip credit (tip credits reduce the minimum wage that must be paid to
tipped employees in certain states) increase the Company's labor costs. This is
especially true in California, where there is no tip credit. Effective October
1, 1996, the Federal minimum wage was increased from $4.25 to $4.75, and
effective September 1, 1997, it was further increased to $5.15. However, a
provision of the new measure effectively froze the minimum wage for tipped
employees at current levels by increasing the allowable tip credit in those
states which allow for a tip credit. Furthermore, in California, voters approved
a proposition on November 5, 1996 that increased the state's minimum wage to
$5.00 on March 1, 1997 and further increased the state's minimum wage to $5.75
on March 1, 1998. In response to the minimum wage increases on October 1, 1996,
March 1, 1997 and March 1, 1998, the Company raised menu prices at its El Torito
restaurants in an effort to recover the higher payroll costs. Chi-Chi's also
raised menu prices in October and December 1997 as a result of the cumulative
impact of these minimum wage increases. Similarly, in March 1998, KKR also
raised menu prices. Although pressure continues for further increases in both
the Federal and California minimum wage levels, the status of proposed
legislation indicates that increases in 1999 are not likely at this time.
Occupancy and other operating expenses of $30,416,000 for the third quarter
of 1998 decreased by $2,237,000 or 6.9% as compared to the same period in 1997.
For the first nine months of 1998, occupancy and other operating expenses of
$92,595,000 decreased by $6,482,000 or 6.5% as compared to the same period in
1997. The decreases are due, in part, to the impact of the 16 restaurants sold
or closed since the beginning of 1997. As a percentage of sales, occupancy and
other operating expenses decreased to 26.4% in the third quarter of 1998 as
compared to 28.0% in the same period in 1997 and decreased to 26.6% for the
first nine months of 1998 as compared to 27.9% in the same period of 1997.
These decreases primarily reflect (i) the impact of El Torito and Chi-Chi's cost
reduction strategies and (ii) a decrease in media advertising expense in El
Torito in the first nine months of 1998 as compared to the same period of 1997.
Depreciation and amortization of $5,586,000 for the third quarter of 1998
increased by $53,000 or 1.0% as compared to the same period in 1997. For the
first nine months of 1998, depreciation and amortization of $16,208,000
decreased by $506,000 or 3.0% as compared to the same period in 1997. The
decrease for the nine month period reflects the impact of (i) the 16 restaurants
sold or closed since the beginning of 1997 and (ii) the write-down of certain
long-lived assets in the second quarter of 1997, partially offset by
depreciation related to the Company's ongoing capital expenditure program.
General and administrative expenses of $7,683,000 for the third quarter of
1998 increased by $288,000 or 3.9% as compared to the same period of 1997. For
the first nine months of 1998, general and administrative expenses of
$21,799,000 decreased by $38,000 or 0.2% as compared to
-17-
<PAGE>
the same period in 1997. As a percentage of sales, general and administrative
expenses increased to 6.7% in the third quarter of 1998 as compared to 6.3% in
the same period of 1997 and increased to 6.3% for the first nine months of 1998
as compared to 6.2% in the same period of 1997. Management continues to closely
evaluate the Company's general and administrative cost structure for savings
opportunities and expects that, as a result of the Merger, general and
administrative costs will decrease as a percentage of sales as the Company
eliminates redundant administrative functions and as these functions operate
more efficiently due to improvements in economies of scale.
The Company reported a loss on disposition of properties of $1.8 million in
the third quarter of 1998 and $3.2 million for the first nine months of 1998 as
compared to a loss of $0.3 million for the third quarter of 1997 and $2.2
million for the first nine months of 1997. These amounts primarily reflect
losses associated with restaurant divestments and closures in such periods.
Also included in the loss on disposition of properties in the third quarter of
1998 is a $0.5 million increase to the Company's reserve for the carrying costs
of closed properties. During the third quarter of 1998, eight Chi-Chi's
restaurants were divested with an additional restaurant divested early in the
fourth quarter of 1998. As part of the Company's strategic planning process
for 1999, management is reviewing the total Chi-Chi's restaurant portfolio to
identify potential restaurant divestment candidates as the Company looks to
focus on Chi-Chi's core operating markets. Up to 50 restaurants are being
considered for inclusion in the divestment listing. As a result, the Company
anticipates that certain divestment reserves could be recorded in the fourth
quarter of 1998. As an initial step in this divestment strategy, five Chi-Chi's
restaurants were closed in late October 1998.
The Company recorded a write-down of long-lived assets in the second
quarter of 1997 of $2.6 million.
Interest expense, net for the third quarter of 1998 of $6,111,000 increased
by $1,109,000 or 22.2% as compared to the same period in 1997. Interest
expense, net for the first nine months of 1998 of $17,937,000 increased by
$3,973,000 or 28.5% as compared to the same period in 1997. These increases were
primarily the result of the issuance of the Senior Discount Notes in August 1997
and January 1998 and the accretion of interest thereon, partially offset by the
elimination of cash interest expense associated with the $15.6 million of Senior
Notes received as part of the exchange on August 12, 1997.
The Merger
- ----------
The Merger and the Hamlet Acquisition will be accounted for as a purchase.
Accordingly, the results of operations and financial position of KKR will be
combined with the results of operations and financial position of the Company's
operations from October 30, 1998 forward. At September 29, 1998, KKR operated
40 Koo Koo Roo California Kitchen restaurants and 14 Hamburger Hamlet
restaurants and had total assets of $55.9 million. For the quarter and nine
months ended September 29, 1998, KKR reported (i) sales of $22.2 million and
$67.3 million, respectively, compared to $20.6 million and $47.8 million,
respectively, for the corresponding periods of the prior year and (ii) operating
losses of $1.5 million and $15.8 million, respectively, compared to $8.0 million
and $13.2 million, respectively, for the corresponding periods of the prior
year. These operating losses included restructuring and other charges (credits)
of $(0.6) million and $11.1 million, respectively, for the quarter and nine
months ended September 29, 1998, compared to $4.6 million
-18-
<PAGE>
and $4.4 million, respectively, for the corresponding periods of the prior year.
EBITDA for the quarter and nine months ended September 29, 1998 amounted to
$(0.7) million and $(0.3) million, respectively, compared to $(1.9) million and
$(4.8) million, respectively, for the corresponding periods of the prior year.
Compensation expense of $6.4 to $8.4 million is expected to be recorded in
the fourth quarter of 1998 in connection with the termination of the Company's
Value Creation Units Plan. Such expense consists of a $3.0 to $5.0 million cash
payment and approximately $3.4 million for the intrinsic value of stock options
to be granted in connection with such termination. The stock options will be
fully vested options to purchase up to 3% of the fully diluted Company Common
Stock immediately following the Merger (including shares to be reserved for
issuance under the Company's 1998 Stock Incentive Plan). Such options will have
a per share strike price not less than the greater of $.50 and 25% of the fair
market value of a share of Company Common Stock on the date of issuance. Such
options will not be exercisable for a period of 90 days after issuance.
Selected Division Operating Data.
- --------------------------------
Through the third quarter of 1998, the Company primarily operated full-
service Mexican restaurants in two divisions under the El Torito, Chi-Chi's,
Casa Gallardo and other names. At September 27, 1998 the Company's El Torito
restaurant division operated 95 restaurants and the Company's Chi-Chi's
restaurant division operated 171 restaurants.
The following table sets forth certain information regarding the Company,
its El Torito and Chi-Chi's restaurant divisions, and the various operations
divested in 1996.
-19-
<PAGE>
<TABLE>
<CAPTION>
For the Quarter Ended For the Nine Months Ended
----------------------------------------- -----------------------------------------
Sept. 27, Sept. 28, Sept. 29, Sept. 27, Sept. 28, Sept. 29,
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ----------- ----------- -----------
($ in thousands, except average check amount)
<S> <C> <C> <C> <C> <C> <C>
El Torito Restaurant Division
- -----------------------------
Restaurants Open at End of Period:
Owned/operated 95 97 98 95 97 98
Franchised and Licensed 8 7 5 8 7 5
Sales $ 53,778 $ 54,961 $ 55,258 $163,170 $167,341 $168,285
Restaurant Level Cashflow (a) 8,719 7,678 6,929 25,749 24,257 20,661
Divisional EBITDA (b) 5,723 4,672 3,015 17,021 15,108 10,364
Percentage increase (decrease) in
comparable restaurant sales 0.1% (0.1)% (4.4)% (0.2)% (0.4)% (0.4)%
Average check $ 10.15 $ 9.75 $ 9.36 $ 10.02 $ 9.70 $ 9.37
Chi-Chi's Restaurant Division
- -----------------------------
Restaurants Open at End of Period:
Owned/operated 171 180 186 171 180 186
Franchised and Licensed 12 16 21 12 16 21
Sales $ 61,515 $ 61,624 $ 66,207 $185,524 $187,325 $215,588
Restaurant Level Cashflow (a) 4,474 4,118 4,005 13,411 12,135 5,666
Divisional EBITDA (b) 96 65 789 1,300 423 (4,845)
Percentage decrease in comparable
restaurant sales 3.1% (5.1)% (13.9)% 0.9 % (9.1)% (12.5)%
Average check $ 8.22 $ 7.37 $ 7.31 $ 7.83 $ 7.45 $ 7.36
Ongoing Operations
- ------------------
Restaurants Open at End of Period:
Owned/operated 266 277 284 266 277 284
Franchised and Licensed 20 23 26 20 23 26
Sales $115,293 $116,585 $121,465 $348,694 $354,666 $383,873
Divisional EBITDA (b) 5,819 4,737 3,804 18,321 15,531 5,519
Divested Operations (c)
- -----------------------
Restaurants Open at End of Period:
Owned/operated 0 0 12 0 0 12
Franchised and Licensed 0 0 0 0 0 0
Sales $ 0 $ 0 $ 7,078 $ 0 $ 0 $222,745
Divisional EBITDA (b) 0 0 (322) 0 0 19,366
Total Company
- -------------
Restaurants Open at End of Period:
Owned/operated 266 277 296 266 277 296
Franchised and Licensed 20 23 26 20 23 26
Sales $115,293 $116,585 $128,543 $348,694 $354,666 $606,618
EBITDA (d) 5,761 4,682 3,538 18,153 15,396 25,220
</TABLE>
(a) Restaurant Level Cashflow with respect to any operating division represents
Divisional EBITDA (as defined below) before general and administrative
expenses and any net franchise profit or miscellaneous income (expense)
reported by the respective division.
(b) Divisional EBITDA with respect to any operating division is defined as
earnings (loss) before opening costs, gain (loss) on disposition of
properties, interest, taxes, depreciation and amortization.
(c) Divested Operations in 1996 includes the results of the Family Restaurant
Division until it was divested on May 23, 1996 and the traditional
dinnerhouse restaurants that were divested by year-end 1996.
(d) EBITDA is defined as earnings (loss) before opening costs, gain (loss) on
disposition of properties, provision for divestitures and write-down of
long-lived assets, restructuring costs, interest, taxes, depreciation and
amortization. The Company has included information concerning EBITDA herein
because it understands that such information is used by certain investors as
one measure of an issuer's historical ability to service debt. EBITDA should
not be considered as an alternative to, or more meaningful than, operating
income (loss) as an indicator of operating performance or to cash flows from
operating activities as a measure of liquidity. Furthermore, other companies
may compute EBITDA differently, and therefore, EBITDA amounts among
companies may not be comparable.
-20-
<PAGE>
PART II. OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
- ------
The Company is involved in various litigation matters incidental to its
business. The Company does not believe that any of the existing claims or
actions will have a material adverse effect upon the consolidated financial
position or results of operations of the Company.
Item 2. Changes in Securities and Use of Proceeds
- ------
None.
Item 3. Defaults Upon Senior Securities
- ------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- ------
None.
Item 5. Other Information
- ------
None.
Item 6. Exhibits and Reports on Form 8-K
- ------
(a) Exhibits
2 (a) Stock Purchase Agreement dated as of March 1, 1996 by and
among Koo Koo Roo Enterprises, Inc., Flagstar Companies, Inc.,
Flagstar Corporation and FRD Acquisition Co. (Filed as Exhibit
2.1 to the Company's Form 10-Q filed with the SEC on May 15,
1996.)
2 (b) Agreement and Plan of Merger, dated as of June 9, 1998, by and
among the Company, FRI-Sub, Inc. and Koo Koo Roo, Inc.
("KKR"). (Filed as Exhibit 2.1 to the Company's Form S-4 filed
with the SEC on July 1, 1998.)
3 (a) Fifth Restated Certificate of Incorporation of the Company.
(Filed as Exhibit 4.1 to the Company's Form S-8 filed with the
SEC on November 12, 1998.)
3 (b) Amendment to Fifth Restated Certificate of Incorporation of
the Company. (Filed as Exhibit 4.2 to the Company's Form S-8
filed with the SEC on November 12, 1998.)
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<PAGE>
3 (c) Amended and Restated Bylaws of the Company. (Filed as Exhibit
4.3 to the Company's Form S-8 filed with the SEC on November
12, 1998.)
4 (a) Indenture dated as of January 27, 1994 Re: $300,000,000 9-3/4%
Senior Notes due 2002. (Filed as Exhibit 4(a) to the Company's
Form 10-K filed with the SEC on March 28, 1994.)
4 (b) Indenture dated as of January 27, 1994 Re: $150,000,000 10-
7/8% Senior Subordinated Discount Notes due 2004. (Filed as
Exhibit 4(b) to the Company's Form 10-K filed with the SEC on
March 28, 1994.)
4 (c) First Supplemental Indenture, dated as of July 3, 1996,
between the Registrant and IBJ Schroder Bank & Trust Company,
a New York Banking corporation, as Trustee. (Filed as Exhibit
10.1 to the Company's Form 8-K filed with the SEC on July 9,
1996.)
4 (d) First Supplemental Indenture, dated as of July 3, 1996,
between the Registrant and Fleet National Bank, as successor
by merger to Fleet National Bank of Massachusetts, formerly
known as Shawmut Bank, N.A., as Trustee. (Filed as Exhibit
10.2 to the Company's Form 8-K filed with the SEC on July 9,
1996.)
4 (e) Note Agreement dated as of August 12, 1997 Re: Up to
$75,000,000 FRI-MRD Corporation Senior Discount Notes due
January 24, 2002. (Filed as Exhibit 4(e) to the Company's Form
10-Q filed with the SEC on November 12, 1997.)
4 (f) Joinder Agreement dated as of January 14, 1998 Re: FRI-MRD
Corporation Senior Discount Notes due January 24, 2002. (Filed
as Exhibit 4(f) to the Company's Form 10-K filed with the SEC
on March 30, 1998.)
4 (g) First Amendment dated as of June 9, 1998 to the Note Agreement
dated August 12, 1997. (Filed as Exhibit 4.7 to the Company's
Form S-4 filed with the SEC on July 1, 1998.)
4 (h) Note Agreement dated as of June 9, 1998 Re: $24,000,000 FRI-
MRD Corporation Senior Secured Discount Notes due January 24,
2002. (Filed as Exhibit 4.8 to the Company's Form S-4 filed
with the SEC on July 1, 1998.)
*4 (i) First Amendment dated as of October 30, 1998 to the Note
Agreement dated as of June 9, 1998.
-22-
<PAGE>
10 (ee) Stock Purchase Agreement dated as of June 9, 1998 by and
between FRI-MRD Corporation and KKR. (Filed as Exhibit 10.1 to
the Company's Form S-4 filed with the SEC on July 1, 1998.)
10 (ff) Amendment Number Three to Loan and Security Agreement, dated
as of April 9, 1998 by and among the parties thereto. (Filed
as Exhibit 10.29 to Amendment No. 1 to the Company's Form S-4
filed with the SEC on August 18, 1998.)
10 (gg) Amendment Number Four to Loan and Security Agreement dated as
of June 9, 1998 by and among the parties thereto. (Filed as
Exhibit 10.30 to Amendment No. 1 to the Company's Form S-4
filed with the SEC on August 18, 1998.)
*10 (hh) Amendment Number Five to Loan and Security Agreement dated as
of October 30, 1998 by and among the parties thereto.
*10 (ii) Koo Koo Roo Enterprises, Inc. 1998 Stock Incentive Plan.
*27 Financial Data Schedule.
- --------
* Filed herewith.
(b) Reports on Form 8-K.
None.
-23-
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Koo Koo Roo Enterprises, Inc.
(Registrant)
By: /s/ Robert T. Trebing, Jr.
--------------------------
Robert T. Trebing, Jr.
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 12, 1998
-24-
<PAGE>
EXHIBIT 4(i)
AMENDMENT NO. 1 TO NOTE AGREEMENT
AMENDMENT NO. 1 to NOTE AGREEMENT (this "Amendment") dated as of
October 30, 1998, by and among FRI-MRD Corporation, a Delaware corporation (the
"Company"), each Purchaser identified on the signature pages hereto and IBJ-
SCHRODER BANK & TRUST COMPANY, as agent for the Purchasers (in such capacity,
the "Agent").
W I T N E S S E T H:
-------------------
WHEREAS, the Company and certain of the Purchasers have entered into
the Note Agreement, dated as of June 9, 1998 (the "Note Agreement"; capitalized
terms used herein without being defined herein shall have the meanings
ascribed to such terms in the Note Agreement), relating to the Company's
$24,000,000 aggregate principal amount of 14% Senior Secured Discount Notes due
January 24, 2002;
WHEREAS, the Purchasers desire to appoint IBJ-Schroder Bank & Trust
Company as Agent, pursuant to Section 8.8 of the Note Agreement;
WHEREAS, the Company agrees to the appointment by the Purchasers of
IBJ-Schroder Bank & Trust Company, as Agent;
WHEREAS, the Company desires to appoint IBJ-Schroder Bank & Trust
Company as Paying Agent and Note Registrar;
WHEREAS, the Company and the Agent acknowledge and agree than each of
the Purchasers identified in Schedule I hereto shall constitute, and have the
rights and obligations of, the Purchasers under the Note Agreement;
WHEREAS, certain of the parties to the Note Agreement specified herein
acknowledge and agree that such parties no longer have any rights or obligations
thereunder, upon the effectiveness of this Amendment;
WHEREAS, the Purchasers agree to purchase all of the Notes to be
issued under the Note Agreement, subject to the satisfaction of the conditions
set forth in section 4 of the Note Agreement; and
<PAGE>
WHEREAS, the parties hereto agree to amend the Note Agreement as
provided herein.
NOW, THEREFORE, for good and valuable consideration, the receipt of
which is hereby acknowledged, the parties hereto agree as follows:
Section 1. Amendments to Note Agreement. (a) Section 7.1 of the Note
----------------------------
Agreement is hereby amended by inserting the following at the end of such
Section:
"Notwithstanding the foregoing, any amendment which affects the Agent,
the Paying Agent or the Note Registrar, as the case may be, shall
require the consent (which shall not unreasonably be withheld) of the
Agent, Paying Agent, or the Note Registrar, as the case may be."
(b) Section 8.5(c) of the Note Agreement is hereby amended by deleting
the word "Agent" contained in the penultimate sentence thereof and inserting the
word "Company" in replacement therefor.
(c) Section 8.8 of the Note Agreement is hereby amend by deleting the
second sentence thereof and inserting the following in replacement therefor:
"The Agent shall act in accordance with the instructions of the
Purchasers holding in excess of 50% of the Accreted Value of the
Notes; provided that the Agent shall not be required to take any
actions hereunder in the absence of instructions from Purchasers
holding in excess of 50% of the Accreted Value of the Notes."
(d) Section 8.9 of the Note Agreement shall be amended by
inserting the following in replacement therefor:
"Section 8.9. Duties of Agent. Agent shall be required to exercise
the reasonable care which a secured party would customarily exercise
with respect to the Pledged
2
<PAGE>
Collateral in its possession, in its capacity as a secured party. The
Agent makes no representation or warranty as to the value or condition
of the Pledged Collateral and has no obligation to ensure compliance
by the Company of its obligations with respect to the Pledged
Collateral."
(e) Section 8 of the Note Agreement is hereby amended by
inserting the following as Sections 8.11 and 8.12 thereof:
"Section 8.11 Indemnification of Agent.
(a) The Company agrees to indemnify the Agent, the Paying Agent, the
Note Registrar and each of their respective directors, officers, employees and
agents (each such person being called an "Indemnitee") against, and to hold each
Indemnitee harmless from, any and all losses, claims, damages, liabilities and
related expenses, including reasonable counsel fees, charges and disbursements,
incurred by or asserted against any Indemnitee arising out of or as a result of
any claim, litigation, investigation or proceeding (whether or not an
Indemnitee is a party thereto) relating to the execution or delivery of this
Agreement or any agreement or instrument contemplated hereby or the
performance by the parties hereto of their respective obligations hereunder;
provided that such indemnity shall not be available to the extent that such
losses, claims, damages, liabilities or related expenses result from or arise
out of the gross negligence or wilful misconduct of any Indemnitee.
(b) To the extent (x) the same shall not have been reimbursed by the
Company (and the Agent shall have utilized reasonable efforts to seek such
reimbursement from the Company) and (y) such claims, damages, liabilities and
related expenses relate to actions taken by the Agent in accordance with this
Agreement or that have been authorized by the Purchasers in accordance with
this Agreement, each Purchaser agrees to indemnify the Agent and each of its
directors, officers, employees and agents (each such person being called an
"Agent Indemnitee") against, and to hold each Agent Indemnitee harmless from, in
the amount of its pro rata share (based on the Accreted Value of Notes held by
such Purchaser), any and all losses, claims, damages, liabilities and related
expenses, including reasonable counsel fees, charges and disbursements, incurred
by or asserted against any Agent Indemnitee arising out of or as a result of any
claim, litigation, investigation or proceeding (whether or not an Agent
Indemnitee is a party thereto) relating to the execution or delivery of this
Agreement or any agreement or
3
<PAGE>
instrument contemplated hereby or the performance by the parties hereto of their
respective obligations hereunder; provided that such indemnity shall not be
available to the extent that such losses, claims, damages, liabilities and
related expenses result from or arise out of the gross negligence or wilful
misconduct of any Agent Indemnitee.
(c) The indemnities set forth in this Section 8.11 shall survive
termination of this Agreement and shall be applicable to any Agent, Paying Agent
and Note Registrar following the resignation or removal of such Agent, Paying
Agent and Note Registrar with respect to actions taken by such Agent prior to
such resignation or removal.
Section 8.12 Resignation and Removal of the Agent.
(a) The Agent may resign from the performance of its functions and
duties hereunder at any time by giving 30 days' prior written notice to the
Purchasers. Such resignation shall take effect upon the appointment of a
successor Agent pursuant to clause (b) below. The Agent may be removed at any
time by the affirmative vote of Purchasers holding at least 50% in aggregate
Accreted Value of the outstanding Notes.
(b) Upon any such notice of resignation or removal, Purchasers holding
at least 50% in aggregate Accreted Value of the outstanding Notes shall appoint
a successor Agent hereunder; provided that such Agent shall be subject to prior
written approval of the Company (which shall not unreasonably be withheld). If
no successor Agent has been appointed within 30 days of the Agent's resignation,
the resigning Agent may appoint a successor Agent. Upon the appointment of a
successor Agent, the resigning or removed Agent shall transfer and assign all
Pledged Collateral in its possession to the successor Agent. Any such successor
Agent shall agree to be bound by the provisions of this Agreement."
(f) Section 9.1 of the Note Agreement is hereby amended by:
(i) replacing the definition of "Business Day" with the
following:
""Business Day" shall mean any day other than a Saturday, Sunday,
statutory holiday or other day on which banks in Los Angeles,
California or New York, New
4
<PAGE>
York are required by law to close or are customarily closed."; and
(ii) inserting the following in appropriate alphabetical
order:
""Paying Agent" shall have the meaning provided under Section 10.12
herein."
(g) Section 10.1 of the Note Agreement is hereby amended by deleting
the first paragraph thereof and inserting the following in replacement therefor:
"The Company may appoint one or more Note Registrars and may
itself act as Note Registrar. The term "Note Registrar" includes any
such Note Registrars. The Company hereby appoints IBJ-Schroder Bank
& Trust Company to act as the initial Note Registrar. The Company
may change or terminate any Note Registrar at any time. The Note
Registrar shall cause to be kept a register (the "Note Register") for
the registration and transfer of the Notes. The Note Registrar will
register or transfer or cause to be registered or transferred, as
hereinafter provided and under such reasonable regulations as it may
prescribe, any Note issued pursuant to this Agreement."
(h) Section 10 of the Note Agreement is further amended by inserting
the following as Section 10.12 thereof:
"Section 10.12. Paying Agent. The Company may, at its option,
appoint a paying agent (the "Paying Agent") with respect to the Notes,
which is authorized by the Company to make payments pursuant to the
instructions of and on behalf of the Company in respect of the
principal of and interest on the Notes. The Company hereby appoints
IBJ-Schroder Bank & Trust Company to act as initial Paying Agent with
respect to the Notes. The Company may appoint one or more additional
5
<PAGE>
Paying Agents and may itself act as Paying Agent. The term "Paying
Agent" includes any such additional Paying Agents. The Company may
also change or terminate at any time any Paying Agent."
(i) The Note Agreement is further amended by deleting Schedule I
thereto and inserting Schedule I hereto in replacement therefor.
(j) The Note Agreement is further amended by incorporating Schedule II
hereto as Schedule II to the Note Agreement.
Section 2. Acceptance of Appointment. Each Purchaser hereby
-------------------------
irrevocably designates and appoints IBJ- Schroder Bank & Trust Company as the
Agent pursuant to Section 8.8 of the Note Agreement. IBJ- Schroder Bank & Trust
Company hereby accepts such appointment as Agent and agrees to be bound in all
respects by the provisions of the Note Agreement. The Agent's notice address
for purposes of the Note Agreement shall be as set forth underneath its
signature to this Amendment.
Section 3. Acknowledgement.
---------------
(a) Each of (i) The Mainstay Funds, on behalf of its High Yield
Corporate Bond Fund Series, (ii) The Mainstay VP Series Fund, Inc., on behalf
of its High Yield Corporate Bond Portfolio and (iii) Teachers' Retirement System
of Louisiana acknowledges and agrees that (x) it is a Purchaser under the Note
Agreement and (y) the term "Purchaser" as used in the Note Agreement shall
mean each such party. Each Purchaser acknowledges and agrees that it has agreed
to purchase the aggregate principal amount of Notes (as defined in the Note
Agreement) set forth opposite such Purchaser's name on the signature pages
hereto, subject to the satisfaction of the conditions set forth in Section 4
of the Note Agreement.
(b) Each of the Company, the Agent and each Purchaser acknowledges
and agrees that it is a party to the Note Agreement, as modified by this
Amendment, and is bound by, entitled to the benefits of, and subject to the
terms of, the Note Agreement, as modified by this Amendment.
(c) Each of (i) the Company, (ii) the Agent and (iii) The Brown &
Williamson Master Retirement Trust, The Mainstay Fund, on behalf of its
Strategic Income Fund, Highbridge Capital Corporation, Police Officers Pension
System of
6
<PAGE>
the City of Houston and Vulcan Materials Company High Yield Account (all
institutions referred to in this clause (iii) are collectively referred to as
"Former Purchasers") acknowledges and agrees that each of the Former Purchasers
is no longer a party to the Note Agreement and has no rights or obligations
thereunder.
Section 4. Waiver.
------
(a) The Purchasers agrees to waive the provisions of Section 5.5 of
the Note Agreement for the period from October 30, 1998 through and including
January 30, 1999 to the extent necessary to permit KKR and its subsidiaries to
maintain and remain liable for secured Indebtedness in an aggregate principal
amount not to exceed $1,600,000, which secured Indebtedness was incurred prior
to the merger of FRI-Sub, Inc. with and into KKR, pursuant to the Merger
Agreement.
(b) Purchasers holding at least 50% in aggregate Accreted Value (as
defined in the Existing Discount Note Agreement) of the outstanding Existing
Discount Notes agree to waive the provisions of Section 5.5 of the Existing
Discount Note Agreement for the period from October 30, 1998 through and
including January 30, 1999 to the extent necessary to permit KKR and its
subsidiaries to maintain and remain liable for secured Indebtedness in an
aggregate principal amount not to exceed $1,600,000, which secured Indebtedness
was incurred prior to the merger of FRI-Sub, Inc. with and into KKR, pursuant to
the Merger Agreement. This clause (b) constitutes a waiver under the Existing
Discount Note Agreement.
Section 5. Status of Note Agreement. This Amendment is limited
------------------------
solely for the purposes and to the extent expressly set forth herein and nothing
herein expressed or implied shall constitute an amendment or waiver of any other
term, provision or condition of the Note Agreement or the Existing Discount Note
Agreement. Except as expressly amended or waived hereby, the terms and
conditions of the Note Agreement and the Existing Discount Note Agreement shall
continue in full force and effect.
Section 6. Effectiveness. This Amendment shall become effective upon
-------------
the execution hereof by the Company, the Agent and each of the Purchasers.
Section 7. Counterparts. This Amendment may be executed in any
------------
number of counterparts, all of which taken together shall constitute one
Amendment, and any of the parties hereto may execute this Amendment by signing
such a counterpart.
7
<PAGE>
Section 8. Headings. The descriptive headings of the various
--------
Sections or parts of this Agreement are for convenience only and shall not
affect the meaning or construction of any of the provisions hereof.
Section 9. Governing Laws. THIS AMENDMENT SHALL BE GOVERNED BY AND
--------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK INCLUDING,
WITHOUT LIMITATION, SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL
OBLIGATIONS LAW AND SECTION 327(b) OF THE NEW YORK CIVIL PRACTICE LAWS AND
RULES.
8
<PAGE>
SCHEDULE I
Purchaser: THE MAINSTAY FUNDS, ON BEHALF OF ITS HIGH YIELD CORPORATE BOND
FUND SERIES
1. Principal Amount of Notes being acquired: $19,000,000
2. In the case of payments on account of the Notes:
By wire transfer of Federal or other immediately available funds
---- --------
(identifying each payment as to issuer, security and principal or interest)
to:
ABA # 011000028
STATE STREET BANK AND TRUST COMPANY
BOSTON, MASS 02101
FOR CREDIT TO:
ACCT NAME: MAINSTAY HIGH YIELD CORPORATE
BOND FUND
DDA # 4266 0761
ACCT # SN04
3. All communications shall be delivered or mailed to:
MacKay-Shields Financial Corporation
9 West 57th Street
New York, New York 10019
Attn: Steven Tananbaum
Fax: (212) 758-4735
with a copy to:
Kleinberg, Kaplan, Wolff & Cohen, P.C.
551 Fifth Avenue
New York, New York 10176
Attn: Fredric A. Kleinberg, Esq.
Fax: (212) 986-8866
4. Tax I.D. #: 04-2910780
9
<PAGE>
Purchaser: MAINSTAY VP SERIES FUND, INC., ON BEHALF OF ITS HIGH
YIELD CORPORATE BOND PORTFOLIO
1. Principal Amount of Notes being acquired: $3,000,000
2. In the case of payments on account of the Notes:
By wire transfer of Federal or other immediately available funds
---- --------
(identifying each payment as to issuer, security and principal or interest)
to:
ABA # 021000018
BANK OF NEW YORK/CUST.
GLA 111612
FOR CREDIT TO:
ACCT NAME: MAINSTAY V.P. SERIES HIGH YIELD CORPORATE BOND FUND
ACCT # 274467
3. All communications shall be delivered or mailed to:
MacKay-Shields Financial Corporation
9 West 57th Street
New York, New York 10019
Attn: Steven Tananbaum
Fax: (212) 758-4735
with a copy to:
Kleinberg, Kaplan, Wolff & Cohen, P.C.
551 Fifth Avenue
New York, New York 10176
Attn: Fredric A. Kleinberg, Esq.
Fax: (212) 986-8866
4. Tax I.D. #: 13-3818793
10
<PAGE>
Purchaser: TEACHERS' RETIREMENT SYSTEM OF LOUISIANA
1. Principal Amount of Notes being acquired: $2,000,000
2. In the case of payments on account of the Notes:
By wire transfer of Federal or other immediately available funds
---- --------
(identifying each payment as to issuer, security and principal or interest)
to:
ABA # 021-001 033
BANKERS TRUST, NY, NY
ACCT # 99-909-782
FOR FURTHER CREDIT TO:
ACCT NAME: TEACHERS RETIREMENT SYSTEM OF
LOUISIANA
ACCT # 173955
3. All communications shall be delivered or mailed to:
MacKay-Shields Financial Corporation
9 West 57th Street
New York, New York 10019
Attn: Steven Tananbaum
Fax: (212) 758-4735
with a copy to:
Kleinberg, Kaplan, Wolff & Cohen, P.C.
551 Fifth Avenue
New York, New York 10176
Attn: Fredric A. Kleinberg, Esq.
Fax: (212) 986-8866
4. Tax I.D. #: 13-2555119
11
<PAGE>
SCHEDULE II
PLEDGED SECURITIES
Issued and Stock
Issuer Outstanding Shares Certificate
- ------ ------------------ -----------
The Hamlet 1,000 shares of Common 3
Group, Inc. Stock, no par value per
share
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized officers to execute and deliver this Amendment as of the date first
above written.
FRI-MRD CORPORATION, as Company
By: /s/ Robert T. Trebing, Jr.
----------------------------
Name: Robert T. Trebing, Jr.
Title: President
[signature pages continued on next page]
<PAGE>
IBJ-SCHRODER BANK & TRUST
COMPANY, as Agent
By:_____________________________
Name:
Title:
Address:
-------------------------
-------------------------
-------------------------
[signature pages continued on next page]
<PAGE>
PURCHASERS:
Principal Amount of Notes: THE MAINSTAY FUNDS, ON BEHALF OF
$19,000,000 ITS HIGH YIELD CORPORATE BOND FUND SERIES
By: MacKay-Shields Financial Corporation
Its: Investment Advisor
By: __________________________
Name: Jeffry B. Platt
Title: Director
[signature pages continued on next page]
<PAGE>
Principal Amount of Notes: THE MAINSTAY VP SERIES FUND, INC.,
$3,000,000 ON BEHALF OF ITS HIGH YIELD CORPORATE BOND
PORTFOLIO
By: MacKay-Shields Financial Corporation
Its: Investment Advisor
By:___________________________
Name: Jeffry B. Platt
Title: Director
[signature pages continued on next page]
<PAGE>
Principal Amount of Notes: TEACHERS' RETIREMENT SYSTEM
$2,000,000 OF LOUISIANA
By: MacKay-Shields Financial Corporation
Its: Investment Advisor
By:___________________________
Name: Jeffry B. Platt
Title: Director
[signature pages continued on next page]
<PAGE>
ACKNOWLEDGED AND AGREED TO BY:
THE BROWN & WILLIAMSON MASTER
RETIREMENT TRUST
By: MacKay-Shield Financial Corporation
Its: Investment Advisor
By:_______________________________
Name: Jeffry B. Platt
Title: Director
[signature pages continued on next page]
<PAGE>
THE MAINSTAY FUND, ON BEHALF OF
ITS STRATEGIC INCOME FUND
By: MacKay-Shields Financial Corporation
Its: Investment Advisor
By: ___________________________
Name: Jeffry B. Platt
Title: Director
[signature pages continued on next page]
<PAGE>
HIGHBRIDGE CAPITAL CORPORATION
By: MacKay-Shields Financial Corporation
Its: Investment Advisor
By:________________________
Name: Jeffry B. Platt
Title: Director
[signature pages continued on next page]
<PAGE>
POLICE OFFICERS PENSION SYSTEM OF
THE CITY OF HOUSTON
By: MacKay-Shields Financial Corporation
Its: Investment Advisor
By:____________________________
Name: Jeffry B. Platt
Title: Director
[signature pages continued on next page]
<PAGE>
VULCAN MATERIALS COMPANY HIGH
YIELD ACCOUNT
By: MacKay-Shields Financial Corporation
Its: Investment Advisor
By:____________________________
Name: Jeffry B. Platt
Title: Director
<PAGE>
IBJ-SCHRODER BANK & TRUST
COMPANY, as Agent
By: /s/ BARBARA McCLUSKEY
---------------------------------
Name: Barbara McCluskey
Title: Vice President
Address:
One State Street
---------------------------------
New York, New York 10004
---------------------------------
---------------------------------
[signature pages continued on next page]
<PAGE>
PURCHASERS:
Principal Amount of Notes: THE MAINSTAY FUNDS, ON BEHALF OF ITS
$19,000,000 HIGH YIELD CORPORATE BOND FUND SERIES
By: MacKay-Shields Financial Corporation
Its: Investment Advisor
By: /s/ ROBERT A. NISI
-------------------------
Name: Robert A. Nisi
Title: Director
[signature pages continued on next page]
<PAGE>
Principal Amount of Notes: THE MAINSTAY VP SERIES FUND, INC.,
$3,000,000 ON BEHALF OF ITS HIGH YIELD
CORPORATE BOND PORTFOLIO
By: MacKay-Shields Financial Corporation
Its: Investment Advisor
By: /s/ ROBERT A. NISI
------------------------------------
Name: Robert A. Nisi
Title: Director
[signature pages continued on next page]
<PAGE>
Principal Amount of Notes: TEACHERS' RETIREMENT SYSTEM
$2,000,000 OF LOUISIANA
By: MacKay-Shields Financial Corporation
Its: Investment Advisor
By: /s/ ROBERT A. NISI
------------------------------------
Name: Robert A. Nisi
Title: Director
[signature pages continued on next page]
<PAGE>
ACKNOWLEDGED AND AGREED TO BY:
THE BROWN & WILLIAMSON MASTER
RETIREMENT TRUST
By: MacKay-Shields Financial Corporation
Its: Investment Advisor
By: /s/ ROBERT A. NISI
------------------------------------
Name: Robert A. Nisi
Title: Director
[signature pages continued on next page]
<PAGE>
THE MAINSTAY FUND, ON BEHALF OF
ITS STRATEGIC INCOME FUND
By: MacKay-Shields Financial Corporation
Its: Investment Advisor
By: /s/ ROBERT A. NISI
------------------------------------
Name: Robert A. Nisi
Title: Director
[signature pages continued on next page]
<PAGE>
HIGHBRIDGE CAPITAL CORPORATION
By: MacKay-Shields Financial Corporation
Its: Investment Advisor
By: /s/ ROBERT A. NISI
------------------------------------
Name: Robert A. Nisi
Title: Director
[signature pages continued on next page]
<PAGE>
POLICE OFFICERS PENSION SYSTEM OF
THE CITY OF HOUSTON
By: MacKay-Shields Financial Corporation
Its: Investment Advisor
By: /s/ ROBERT A. NISI
------------------------------------
Name: Robert A. Nisi
Title: Director
[signature pages continued on next page]
<PAGE>
VULCAN MATERIALS COMPANY HIGH
YIELD ACCOUNT
By: MacKay-Shields Financial Corporation
Its: Investment Advisor
By: /s/ ROBERT A. NISI
------------------------------------
Name: Robert A. Nisi
Title: Director
<PAGE>
EXHIBIT 10(hh)
AMENDMENT NUMBER FIVE TO
LOAN AND SECURITY AGREEMENT
This AMENDMENT NUMBER FIVE TO LOAN AND SECURITY AGREEMENT (this
"Amendment") is entered into as of October 30, 1998, by and between Foothill
Capital Corporation, a California corporation ("Foothill"), on the one hand, and
FRI-MRD Corporation, a Delaware corporation ("FRI-MRD"), El Torito Restaurants,
Inc., a Delaware corporation ("El Torito"), and Chi-Chi's, Inc., a Delaware
corporation ("Chi-Chi's"), on the other hand, with reference to the following
facts:
A. Foothill, on the one hand, and El Torito, Chi-Chi's, FRI-MRD, and
certain of their Affiliates, on the other hand, heretofore have
entered into that certain Loan and Security Agreement, dated as of
January 10, 1997 (as heretofore amended, supplemented, or otherwise
modified, the "Agreement");
B. El Torito and Chi-Chi's (individually and collectively, jointly and
severally, "Borrower"), FRI-MRD, and Foothill desire to amend the
Agreement as set forth in this Amendment; and
C. All capitalized terms used herein and not defined herein shall have
the meanings ascribed to them in the Agreement, as amended hereby.
NOW, THEREFORE, in consideration of the above recitals and the mutual
premises contained herein, Foothill, Borrower and FRI-MRD hereby agree as
follows:
1. Amendments to the Agreement.
---------------------------
a. Section 1.1 of the Agreement hereby is amended by adding or
-----------
modifying, as the case may be, the following definitions:
"HGI Subsidiaries" means those Persons identified on Schedule
---------------- --------
5.18 of the Agreement.
- ----
"KKR Subsidiaries" means those Persons identified on
Schedule 5.19 of the Agreement .
- -------------
b. The following is added as a new Section 5.18 to the
------------
Agreement:
5.18 HGI Subsidiaries. Except as set forth on Schedule 5.18, the HGI
-------------
Subsidiaries have no liabilities, properties or assets, or engage in any
business activities.
c. The following is added as a new Section 5.19 to the
------------
Agreement:
<PAGE>
5.19 KKR Subsidiaries. Except as set forth on Schedule 5.19, the KKR
-------------
Subsidiaries have no liabilities, properties or assets, or engage in
any business activities.
d. The following is added as a new Section 7.22 to the
------------
Agreement:
7.22 HGI Subsidiaries. Permit, except as set forth on Schedule 5.18,
-------------
the HGI Subsidiaries to incur any liabilities, or to hold any
properties or assets, or to engage in any business activities.
e. The following is added as a new Section 7.23 to the
------------
Agreement:
7.23 KKR Subsidiaries. Permit, except as set forth on Schedule 5.19,
-------------
the KKR Subsidiaries to incur any liabilities, or to hold any
properties or assets, or to engage in any business activities.
f. Schedule 5.18 and Schedule 5.19 are hereby incorporated
------------- -------------
into the Agreement by this reference.
2. Conditions Precedent to the Effectiveness of this Amendment.
-----------------------------------------------------------
The effectiveness of this Amendment is subject to the fulfillment, to the
satisfaction of Foothill and its counsel, of each of the following conditions:
a. Foothill shall have received a certificate from the
Secretary of each of Borrower and FRI-MRD attesting that all of the HGI
Subsidiaries, as set forth on Schedule 5.18 of the Agreement, as hereby amended,
-------------
have no liabilities, properties or assets, or engage in any business activities,
except as set forth on Schedule 5.18 of the Agreement, as hereby amended.
-------------
b. Foothill shall have received a certificate from the
Secretary of each of Borrower and FRI-MRD attesting that all of the KKR
Subsidiaries, as set forth on Schedule 5.19 of the Agreement, as hereby amended,
-------------
have no liabilities, properties or assets, or engage in any business activities,
except as set forth on Schedule 5.19 of the Agreement, as hereby amended.
-------------
c. Foothill shall have received the reaffirmation and
consent attached hereto as Exhibit A, duly executed by each Guarantor, and such
---------
document shall be in full force and effect;
d. The representations and warranties in this Amendment,
the Agreement as amended by this Amendment, and the other Loan Documents shall
be true and correct in all respects on and as of the date hereof, as though made
on such date (except to the extent that such representations and warranties
relate solely to an earlier date);
e. After giving effect hereto, no Event of Default or event
which with the giving of notice or passage of time would constitute an Event of
Default shall have
2
<PAGE>
occurred and be continuing on the date hereof, nor shall result from the
consummation of the transactions contemplated herein;
f. No injunction, writ, restraining order, or other order of any
nature prohibiting, directly or indirectly, the consummation of the transactions
contemplated herein shall have been issued and remain in force by any
governmental authority against Borrower, FRI-MRD, any Guarantor, Foothill, or
any of their Affiliates; and
g. No material adverse change shall have occurred in the financial
condition of Borrower, FRI-MRD, any Guarantor, or in the value of the
Collateral.
2A. Conditions Subsequent. As a condition subsequent to the effectiveness
---------------------
of this Amendment, each of FRI-MRD and Borrower shall perform or cause to be
performed the following (the failure by FRI-MRD or Borrower to so perform or
cause to be performed constituting an Event of Default under the Agreement):
a. Anything in Section 2.2 of the Security Agreement, dated as of
October 30, 1998 (the "KKR Security Agreement"), entered into between KKR and
Foothill to the contrary notwithstanding, within 30 days after the date of
consummation of the KKR Merger, KKR shall (i) execute and deliver to Foothill a
stock pledge agreement (substantially in the form of the Stock Pledge Agreement
executed and delivered by Chi-Chi's with respect to the Stock of the Chi-Chi's
Subsidiaries), and (ii) deliver to Foothill possession of the original Stock
certificates respecting 65% of the issued and outstanding shares of Stock of
1170060 Ontario Limited;
b. Anything in Section 2.2 of the KKR Security Agreement to the
contrary notwithstanding, within 30 days after the date of consummation of the
KKR Merger, with respect to each KKR Subsidiary in existence as of the date of
consummation of the KKR Merger (other than 1170060 Ontario Limited), KKR shall
(i) merge such KKR Subsidiary with and into KKR, with KKR being the surviving
Person, (ii) merge such KKR Subsidiary into another KKR Subsidiary, (iii)
dissolve such KKR Subsidiary, or (iv) deliver to Foothill possession of the
original Stock certificates of such KKR Subsidiary respecting all of the issued
and outstanding shares of Stock of such KKR Subsidiary; and
c. Within 120 days after the date of consummation of the KKR Merger,
Foothill shall have received evidence, satisfactory to Foothill in its sole
discretion, that the obligations of KKR guaranteeing the obligations under
certain mortgages of certain Persons in which KKR owns an equity interest under
have been terminated. Anything in the Loan Agreement or other Loan Documents to
the contrary notwithstanding, for such 120 day period, such obligations of KKR
shall not constitute an Event of Default to the extent that (i) the aggregate
amount of such obligations do not exceed $1,750,000, (ii) such obligations were
in existence as of the date of consummation of the KKR Merger, and (iii) such
obligations have been disclosed to Foothill.
3. Representations and Warranties. Each of Borrower and FRI-MRD
------------------------------
3
<PAGE>
hereby represents and warrants to Foothill that: (a) the execution, delivery,
and performance of this Amendment and of the Agreement, as amended by this
Amendment, are within its corporate powers, have been duly authorized by all
necessary corporate action, and are not in contravention of any law, rule, or
regulation, or any order, judgment, decree, writ, injunction, or award of any
arbitrator, court, or governmental authority, or of the terms of its charter or
bylaws, or of any contract or undertaking to which it is a party or by which any
of its properties may be bound or affected; (b) this Amendment and the
Agreement, as amended by this Amendment, constitute Borrower's and FRI-MRD's
legal, valid, and binding obligation, enforceable against Borrower and FRI-MRD
in accordance with its terms.
4. Effect on Agreement. The Agreement, as amended hereby, shall be
-------------------
and remain in full force and effect in accordance with its respective terms and
hereby is ratified and confirmed in all respects. The execution, delivery, and
performance of this Amendment shall not operate as a waiver of or, except as
expressly set forth herein, as an amendment, of any right, power, or remedy of
Foothill under the Agreement, as in effect prior to the date hereof.
5. Choice of Law and Venue; Jury Trial Waiver. Section 13 of the
------------------------------------------
Agreement is incorporated herein by this reference as though fully set forth
herein.
6. Miscellaneous.
-------------
a. Upon the effectiveness of this Amendment, each reference in
the Agreement to "this Agreement", "hereunder", "herein", "hereof" or words of
like import referring to the Agreement shall mean and refer to the Agreement as
amended by this Amendment.
b. Upon the effectiveness of this Amendment, each reference in
the Loan Documents to the "Agreement", "thereunder", "therein", "thereof" or
words of like import referring to the Agreement shall mean and refer to the
Agreement as amended by this Amendment.
c. This Amendment may be executed in any number of counterparts,
all of which taken together shall constitute one and the same instrument and any
of the parties hereto may execute this Amendment by signing any such
counterpart. Delivery of an executed counterpart of this Amendment by
telefacsimile shall be equally as effective as delivery of a manually executed
counterpart of this Amendment. Any party delivering an executed counterpart of
this Amendment by telefacsimile also shall deliver a manually executed
counterpart of this Amendment but the failure to deliver a manually executed
counterpart shall not affect the validity, enforceability, and binding effect of
this Amendment.
[remainder of page intentionally left blank]
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date first written above.
FRI-MRD CORPORATION,
a Delaware corporation
By /s/ ROBERT T. TREBING, JR.
------------------------------------
Title: PRESIDENT
----------------------------------
EL TORITO RESTAURANTS, INC.,
a Delaware corporation
By /s/ ROBERT T. TREBING, JR.
------------------------------------
Title: VICE PRESIDENT
----------------------------------
CHI-CHI'S INC.,
a Delaware corporation
By /s/ ROBERT T. TREBING, JR.
------------------------------------
Title: VICE PRESIDENT
----------------------------------
FOOTHILL CAPITAL CORPORATION,
a California corporation
By /s/ KEVIN M. COYLE
------------------------------------
Title: SENIOR VICE PRESIDENT
----------------------------------
-S-1-
<PAGE>
SCHEDULE 5.18
-------------
HGI Subsidiaries.
-----------------
================================================================================
Entity Assets
------ ------
- --------------------------------------------------------------------------------
H.H.K. of Virginia, Inc. Non-assignable liquor licenses
- --------------------------------------------------------------------------------
H.H. of Maryland, Inc. Non-assignable liquor licenses
================================================================================
Schedule 5.18
<PAGE>
SCHEDULE 5.19
-------------
KKR Subsidiaries.
-----------------
<TABLE>
<CAPTION>
=========================================================================
Entity Assets
------ ------
-------------------------------------------------------------------------
<S> <C>
Arrosto Coffee Company, Inc. Certain trademark rights in Canada
-------------------------------------------------------------------------
Arrosto Coffee Company None
Franchising, Inc.
-------------------------------------------------------------------------
A.C.C. Las Vegas LLC None
-------------------------------------------------------------------------
CMM Dissolution, Inc. Certain trademark rights in Canada
-------------------------------------------------------------------------
Color Me Mine SW, LLC None
-------------------------------------------------------------------------
Caulk 'N Paw None
-------------------------------------------------------------------------
Lean Chick - 792 Lexington, Inc. None
-------------------------------------------------------------------------
Food-Eez, Inc. None
-------------------------------------------------------------------------
Koo Koo Roo Licensing Systems, None
Inc.
-------------------------------------------------------------------------
1170060 Ontario Limited None
=========================================================================
</TABLE>
Schedule 5.19
<PAGE>
EXHIBIT 10(ii)
KOO KOO ROO ENTERPRISES, INC.
1998 STOCK INCENTIVE PLAN
Section 1. General Purpose of Plan; Definitions.
The name of this plan is the Koo Koo Roo Enterprises, Inc. 1998 Stock
Incentive Plan (the "Plan"). The Plan was adopted by the Board (defined below)
on October 29, 1998, subject to the approval of the stockholders of the Company
(defined below), which approval was obtained on October 29, 1998. The purpose of
the Plan is to enable the Company to attract and retain highly qualified
personnel who will contribute to the Company's success and to provide incentives
to the Participants (defined below) that are linked directly to increases in
stockholder value and will therefore inure to the benefit of all stockholders of
the Company.
For purposes of the Plan, the following terms shall be defined as set
forth below:
(1) "Administrator" means the Board, or if and to the extent the
-------------
Board does not administer the Plan, the Committee in accordance with Section 2.
(2) "Board" means the Board of Directors of the Company.
-----
(3) "Code" means the Internal Revenue Code of 1986, as amended from
----
time to time, or any successor thereto.
(4) "Committee" means the Compensation and Stock Option Committee of
---------
the Board or any Committee the Board may subsequently appoint to administer the
Plan. To the extent applicable, the Committee shall be composed entirely of
individuals who meet the qualifications referred to in Section 162(m) of the
Code and Rule 16b-3 under the Exchange Act. If at any time or to any extent the
Board shall not administer the Plan, then the functions of the Board specified
in the Plan shall be exercised by the Committee.
(5) "Company" means Family Restaurants, Inc. a Delaware corporation,
-------
which will be named Koo Koo Roo Enterprises, Inc. following the effective time
of the Merger, and any successor corporation.
<PAGE>
(6) "Deferred Stock" means an award made pursuant to Section 7 of the
--------------
right to receive Stock at the end of a specified deferral period.
(7) "Disability" means the inability of a Participant to perform
----------
substantially his duties and responsibilities to the Company or any Subsidiary
by reason of a physical or mental disability or infirmity (i) for a continuous
period of six months, or (ii) at such earlier time as the Participant submits
medical evidence satisfactory to the Administrator that the Participant has a
physical or mental disability or infirmity that will likely prevent the
Participant from returning to the performance of the Participant's work duties
for six months or longer. The date of such Disability shall be the last day of
such six-month period or the day on which the Participant submits such
satisfactory medical evidence, as the case may be.
(8) "Effective Date" means the date on which the Merger occurs.
--------------
(9) "Eligible Recipient" means an officer, director, employee,
------------------
consultant or advisor of the Company or any Subsidiary, responsible for, or in a
position to contribute to, the management, growth and/or profitability of the
business of the Company and its Subsidiaries.
(10) "Exchange Act" shall mean the Securities Exchange Act of
------------
1934, as amended, and any successor statute thereto.
(11) "Fair Market Value" means, as of any given date, with respect to
-----------------
any awards granted hereunder, (A) if the Stock is publicly traded, the closing
sale price of a share of Stock on such date as reported in the Western Edition
of The Wall Street Journal, or the average of the closing price of a share of
Stock on each day on which the Stock was traded over a period of up to twenty
trading days immediately prior to such date, (B) the fair market value of a
share of Stock as determined in accordance with a method prescribed in the
agreement evidencing any award hereunder, (C) in the case of a Limited Stock
Appreciation Right, the "Change of Control Price" (as defined in the agreement
evidencing such Limited Stock Appreciation Right) of a share of Stock as of the
date of exercise or (D) the fair market value of a share of Stock as otherwise
determined by the Administrator in the good faith exercise of its discretion.
(12) "Incentive Stock Option" means any Stock Option intended to be
----------------------
designated as an "incentive stock option" within the meaning of Section 422 of
the Code.
2
<PAGE>
(13) "Limited Stock Appreciation Right" means a Stock Appreciation
--------------------------------
Right that can be exercised only in the event of a "Change of Control" (as
defined in the award evidencing such Limited Stock Appreciation Right).
(14) "Merger" means the merger of FRI-Sub, Inc., a Delaware
------
corporation and indirect wholly owned subsidiary of Family Restaurants, Inc.,
with and into Koo Koo Roo, Inc., a Delaware corporation.
(15) "Non-Qualified Stock Option" means any Stock Option that is not
--------------------------
an Incentive Stock Option, including any Stock Option that provides (as of the
time such option is granted) that it will not be treated as an Incentive Stock
Option.
(16) "Parent Corporation" means any corporation (other than the
------------------
Company) in an unbroken chain of corporations ending with the Company, if each
of the corporations in the chain (other than the Company) owns stock possessing
50% or more of the combined voting power of all classes of stock in one of the
other corporations in the chain.
(17) "Participant" means any Eligible Recipient selected by the
-----------
Administrator, pursuant to the Administrator's authority in Section 2, to
receive grants of Stock Options, Stock Appreciation Rights, Limited Stock
Appreciation Rights, Restricted Stock awards, Deferred Stock awards, Performance
Shares or any combination of the foregoing.
(18) "Performance Share" means an award of shares of Stock pursuant to
-----------------
Section 7 that is subject to restrictions based upon the attainment of specified
performance objectives.
(19) "Restricted Stock" means an award granted pursuant to Section 7
----------------
of shares of Stock subject to certain restrictions.
(20) "Stock" means the common stock, par value $.01 per share, of the
-----
Company.
(21) "Stock Appreciation Right" means the right pursuant to an award
------------------------
granted under Section 6 to receive an amount equal to the excess, if any, of (A)
the Fair Market Value, as of the date such Stock Appreciation Right or portion
thereof is surrendered, of the shares of Stock covered by such right or such
portion thereof, over (B) the aggregate exercise price of such right or such
portion thereof.
3
<PAGE>
(22) "Stock Option" means any option to purchase shares of Stock
------------
granted pursuant to Section 5.
(23) "Subsidiary" means any corporation (other than the Company) in an
----------
unbroken chain of corporations beginning with the Company, if each of the
corporations (other than the last corporation) in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in the chain.
Section 2. Administration.
The Plan shall be administered in accordance with the requirements of
Section 162(m) of the Code (but only to the extent necessary to maintain
qualification of the Plan under Section 162(m) of the Code) and, to the extent
applicable, Rule 16b-3 under the Exchange Act ("Rule 16b-3") by the Board or by
the Committee, which shall be appointed by, and serve at the pleasure of, the
Board.
The Administrator shall have the power and authority to grant to
Eligible Recipients pursuant to the terms of the Plan: (a) Stock Options, (b)
Stock Appreciation Rights, (c) Restricted Stock, (d) Performance Shares, (e)
Deferred Stock or (f) any combination of the foregoing. In particular, the
Administrator shall have the authority to:
(a) select Eligible Recipients to be Participants;
(b) determine whether and to what extent Stock Options, Stock
Appreciation Rights, Restricted Stock, Deferred Stock, Performance Shares or a
combination of the foregoing, are to be granted hereunder to Participants;
(c) determine the number of shares of Stock to be covered by
each award granted hereunder;
(d) determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted hereunder (including, but not
limited to, (x) the restrictions applicable to Restricted or Deferred Stock
awards and the conditions under which restrictions applicable to such Restricted
or Deferred Stock shall lapse, and (y) the performance goals and periods
applicable to the award of Performance Shares);
4
<PAGE>
(e) determine the terms and conditions, not inconsistent with
the terms of the Plan, which shall govern all written instruments evidencing the
Stock Options, Stock Appreciation Rights, Restricted Stock, Deferred Stock,
Performance Shares or any combination of the foregoing granted hereunder; and
(f) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option has declined since the date the Option was granted.
The Administrator shall have the authority, in its discretion, to
adopt, alter and repeal such administrative rules, guidelines and practices
governing the Plan as it shall from time to time deem advisable; to interpret
the terms and provisions of the Plan and any award issued under the Plan (and
any agreements relating thereto); and to otherwise supervise the administration
of the Plan.
All decisions made by the Administrator pursuant to the provisions of
the Plan shall be final and binding on all persons, including the Company and
the Participants.
Section 3. Stock Subject to Plan.
The total number of shares of Stock reserved and available for
issuance under the Plan shall be 20,787,448. Such shares may consist, in whole
or in part, of authorized and unissued shares or treasury shares. The aggregate
number of shares of Stock as to which Stock Options, Stock Appreciation Rights,
Restricted Stock and Performance Shares may be granted to any individual during
any calendar year may not, subject to adjustment as provided in this Section 3,
exceed 100% of the shares of Stock reserved for the purposes of the Plan in
accordance with the provisions of this Section 3.
Consistent with the provisions of Section 162(m) of the Code, as from
time to time applicable, to the extent that (i) a Stock Option expires or is
otherwise terminated without being exercised, or (ii) any shares of Stock
subject to any Restricted Stock, Deferred Stock or Performance Share award
granted hereunder are forfeited, such shares shall again be available for
issuance in connection with future awards under the Plan. If any shares of
Stock have been pledged as collateral for indebtedness incurred by a Participant
in connection with the exercise of a Stock Option and such shares are returned
to the Company in satisfaction of
5
<PAGE>
such indebtedness, such shares shall again be available for issuance in
connection with future awards under the Plan.
Upon any reclassification, recapitalization, stock split (including a
stock split in the form of a stock dividend) or reverse stock split; any merger,
combination, consolidation, or other reorganization; any spin-off, split-up, or
similar extraordinary dividend distribution ("spin-off") in respect of the Stock
(whether in the form of securities or property); any exchange of Stock or other
securities of the Company, or any similar, unusual or extraordinary corporate
transaction in respect of the Stock; or a sale of all or substantially all of
the assets of the Company as an entirety ("asset sale"); the Administrator
shall, in such manner, to such extent (if any) and at such time, in each case as
it deems appropriate and equitable in the circumstances under its sole
discretion:
(a) proportionately adjust any or all of (1) the number and
type of shares of Stock (or other securities) that thereafter may be made the
subject of any awards granted hereto (including the specific maxima and numbers
of shares set forth elsewhere in this Plan), (2) the number, amount and type of
shares of Stock (or other securities or property) subject to any or all
outstanding awards granted hereunder, (3) the grant, purchase, or exercise price
of any or all outstand ing awards granted hereunder, (4) the securities, cash or
other property deliverable upon exercise of any outstanding awards granted
hereunder, or (5) the performance standards appropriate to any outstanding
awards granted hereunder, or
(b) in the case of a reclassification, recapitalization,
merger, consolidation, combination, or other reorganization, spin off or asset
sale, make provision for a cash payment or for the substitution or exchange of
any or all outstanding share-based awards granted hereunder or the cash,
securities or property deliverable to the holder of any or all outstanding
share-based awards granted hereunder, based upon the distribution or
consideration payable to holders of the Stock upon or in respect of such event.
In each case, with respect to awards of Incentive Stock Options, no
adjustment will be made that would cause the Plan to violate Section 424(a) of
the Code or any successor provisions without the written consent of holders
materially adversely affected thereby.
In any of such events, the Administrator may take such action prior to
such event to the extent that the Administrator deems the action necessary to
6
<PAGE>
permit the Participant to realize the benefits intended to be conveyed with
respect to the underlying shares in the same manner as is or will be available
to shareholders generally.
Section 4. Eligibility.
Eligible Recipients shall be eligible to be granted Stock Options,
Stock Appreciation Rights, Restricted Stock awards, Deferred Stock awards or
Performance Shares hereunder. The Participants under the Plan shall be selected
from time to time by the Administrator from among the Eligible Recipients
recommended by the senior management of the Company.
Section 5. Stock Options.
Stock Options may be granted alone or in addition to other awards
granted under the Plan. Stock Options granted under the Plan shall be in such
form as the Administrator may from time to time approve, and the provisions of
Stock Option awards need not be the same with respect to each optionee.
Recipients of Stock Options shall enter into an award agreement with the
Company, in such form as the Administrator shall determine, which agreement
shall set forth, among other things, the exercise price of the option, the term
of the option and provisions regarding exercisability of such option. More than
one option may be granted to the same optionee and be outstanding concurrently
hereunder.
Stock Options granted under the Plan may be (i) Incentive Stock
Options or (ii) Non-Qualified Stock Options. The Administrator shall have the
authority to grant any officer or employee of the Company (including directors
who are also officers of the Company) Incentive Stock Options, Non-Qualified
Stock Options, or both types of Stock Options. Directors who are not officers
of the Company, consultants and advisors may only be granted Non-Qualified Stock
Options. To the extent that any Stock Option does not qualify as an Incentive
Stock Option, it shall constitute a separate Non-Qualified Stock Option.
Stock Options granted under the Plan shall be subject to the following
terms and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Administrator shall deem
desirable:
7
<PAGE>
(1) Option Price. The option price per share of Stock purchasable
------------
under a Stock Option shall be determined by the Administrator at the time of
grant but shall not, in the case of Incentive Stock Options, be less than 100%
of the Fair Market Value on such date and shall not, in any event, be less than
the par value (if any) of a share of Stock. If an employee owns or is deemed to
own (by reason of the attribution rules applicable under Section 424(d) of the
Code) more than 10% of the combined voting power of all classes of stock of the
Company or any Parent Corporation and an Incentive Stock Option is granted to
such employee, the option price of such Incentive Stock Option (to the extent
required by the Code at the time of grant) shall be no less than 110% of the
Fair Market Value on the date such Incentive Stock Option is granted.
(2) Option Term. The term of each Stock Option shall be fixed by the
-----------
Administrator, but no Stock Option shall be exercisable more than ten years
after the date such Stock Option is granted. If an employee owns or is deemed
to own (by reason of the attribution rules of Section 424(d) of the Code) more
than 10% of the combined voting power of all classes of stock of the Company or
any Parent Corporation and an Incentive Stock Option is granted to such
employee, the term of such Incentive Stock Option (to the extent required by the
Code at the time of grant) shall be no more than five years from the date of
grant.
(3) Exercisability. Stock Options shall be exercisable at such time
--------------
or times and subject to such terms and conditions as shall be determined by the
Administrator at or after grant. The Administrator may provide that any Stock
Option shall be exercisable only in installments, and the Administrator may
waive such installment exercise provisions at any time in whole or in part based
on such factors as the Administrator may determine, including but not limited to
in connection with any change in control of the Company.
(4) Method of Exercise. Subject to Section 5(3), Stock Options may
------------------
be exercised in whole or in part at any time during the option period, by giving
written notice to the Company specifying the number of shares to be purchased,
accompanied by payment in full of the purchase price. As determined by the
Administrator, payment in whole or in part may be made (i) in cash or its
equivalent, (ii) by means of any cashless exercise procedure approved by the
Administrator, (iii) in the form of unrestricted Stock owned by the optionee, or
(iv) in the case of the exercise of a Non-Qualified Stock Option, in the form of
Restricted Stock or Performance Shares subject to an award hereunder (based, in
each case, on the Fair Market Value on the date the option is exercised);
provided,
- --------
8
<PAGE>
that in the case of an Incentive Stock Option, the right to make payment in the
form of already owned shares may be authorized only at the time of grant. If
payment of the exercise price of a Non-Qualified Stock Option is made in whole
or in part in the form of Restricted Stock or Performance Shares, the shares
received upon such exercise shall be restricted in accordance with the original
terms of the Restricted Stock or Performance Share award in question, except
that the Administrator may direct that such restrictions shall apply only to
that number of shares equal to the number of shares surrendered upon such
exercise. An optionee shall generally have the rights to dividends and any other
rights of a stockholder with respect to the Stock subject to the option only
after the optionee has given written notice of exercise, has paid in full for
such shares, and, if requested, has given the representation described in
Section 10(1).
The Administrator may require the voluntary surrender of all or a
portion of any Stock Option granted under the Plan as a condition precedent to
the grant of a new Stock Option. Subject to the provisions of the Plan, such
new Stock Option shall be exercisable at the price, during such period and on
such other terms and conditions as are specified by the Administrator at the
time the new Stock Option is granted. Consistent with the provisions of Section
162(m), to the extent applicable, upon their surrender, Stock Options shall be
canceled and the shares previously subject to such canceled Stock Options shall
again be available for grants of Stock Options and other awards hereunder.
(5) Loans. The Company may make loans available to Stock Option
-----
holders in connection with the exercise of outstanding options granted under the
Plan, as the Administrator, may determine. Such loans shall (i) be evidenced by
promissory notes entered into by the Stock Option holders in favor of the
Company, (ii) be subject to the terms and conditions set forth in this Section
5(5) and such other terms and conditions, not inconsistent with the Plan, as the
Administrator shall determine, (iii) bear interest at the applicable Federal
interest rate or such other rate as the Administrator shall determine, and (iv)
be subject to Board approval (or to approval by the Administrator to the extent
the Board may delegate such authority). In no event may the principal amount of
any such loan exceed the sum of (x) the exercise price less the par value (if
any) of the shares of Stock covered by the option, or portion thereof, exercised
by the holder, and (y) any federal, state, and local income tax attributable to
such exercise. The initial term of the loan, the schedule of payments of
principal and interest under the loan, the extent to which the loan is to be
with or without recourse against the holder with respect to principal or
interest and the conditions upon which the loan will
9
<PAGE>
become payable in the event of the holder's termination of employment shall be
determined by the Administrator. Unless the Administrator determines otherwise,
when a loan is made, shares of Stock having a Fair Market Value at least equal
to the principal amount of the loan shall be pledged by the holder to the
Company as security for payment of the unpaid balance of the loan, and such
pledge shall be evidenced by a pledge agreement, the terms of which shall be
determined by the Administrator provided, that each loan shall comply with all
--------
applicable laws, including, without limitation, the regulations and rules of the
Board of Governors of the Federal Reserve System and any other governmental
agency having jurisdiction.
(6) Non-Transferability of Options. Unless otherwise determined by
------------------------------
the Administrator, no Stock Option shall be transferable.
(7) Termination of Employment or Service. If an optionee's
------------------------------------
employment with or service as a director, consultant or advisor to the Company
terminates by reason of death, Disability or for any other reason, the Stock
Option may thereafter be exercised to the extent provided in the applicable
subscription or award agreement, or as otherwise determined by the
Administrator.
(8) Annual Limit on Incentive Stock Options. To the extent that the
---------------------------------------
aggregate Fair Market Value (determined as of the date the Incentive Stock
Option is granted) of shares of Stock with respect to which Incentive Stock
Options granted to an Optionee under this Plan and all other option plans of the
Company or its Parent Corporation become exercisable for the first time by the
Optionee during any calendar year exceeds $100,000, such Stock Options shall be
treated as Non-Qualified Stock Options.
Section 6. Stock Appreciation Rights.
(1) Grant and Exercise. Stock Appreciation Rights may be granted
------------------
either alone ("Free Standing Rights") or in conjunction with all or part of any
Stock Option ("Related Rights"). In the case of a Non-Qualified Stock Option,
Related Rights may be granted either at or after the time of the grant of such
Stock Option. In the case of an Incentive Stock Option, Related Rights may be
granted only at the time of the grant of the Incentive Stock Option.
A Related Right or applicable portion thereof granted in conjunction
with a given Stock Option shall terminate and no longer be exercisable upon the
10
<PAGE>
termination or exercise of the related Stock Option, except that, unless
otherwise provided by the Administrator at the time of grant, a Related Right
granted with respect to less than the full number of shares covered by a related
Stock Option shall only be reduced if and to the extent that the number of
shares covered by the exercise or termination of the related Stock Option
exceeds the number of shares not covered by the Related Right.
A Related Right may be exercised by an optionee, in accordance with
Section 6(2), by surrendering the applicable portion of the related Stock
Option. Upon such exercise and surrender, the optionee shall be entitled to
receive an amount determined in the manner prescribed in Section 6(2). Stock
Options that have been so surrendered, in whole or in part, shall no longer be
exercisable to the extent the Related Rights have been so exercised.
(2) Terms and Conditions. Stock Appreciation Rights shall be subject
--------------------
to such terms and conditions, not inconsistent with the provisions of the Plan,
as shall be determined from time to time by the Administrator, including the
following:
(a) Related Rights shall be exercisable only at such time or
times and to the extent that the Stock Options to which they relate shall be
exercisable in accordance with the provisions of Section 5 and this Section 6;
provided, that (i) Limited Stock Appreciation Rights may only be exercised
- --------
within the 30-day period following a "Change of Control" (as defined by the
Administrator in the agreement evidencing such Limited Stock Appreciation Right)
and (ii) no Related Right shall be exercisable during the first six months of
its term, except that this additional limitation shall not apply in the event of
death or Disability of the optionee prior to the expiration of such six-month
period.
(b) Upon the exercise of a Related Right, an optionee shall be
entitled to receive up to, but not more than, an amount in cash or that number
of shares of Stock (or in some combination of cash and shares of Stock) equal in
value to the excess of the Fair Market Value as of the date of exercise over the
option price per share specified in the related Stock Option multiplied by the
number of shares of Stock in respect of which the Related Right is being
exercised, with the Administrator determining the form of payment.
(c) Related Rights shall be transferable only when and to the
extent that the underlying Stock Option would be transferable under Section
5(6).
11
<PAGE>
(d) Upon the exercise of a Related Right, the Stock Option or
part thereof to which such Related Right is related shall be deemed to have been
exercised for the purpose of the limitation set forth in Section 3 on the number
of shares of Stock to be issued under the Plan, but only to the extent of the
number of shares issued under the Related Right.
(e) A Related Right granted in connection with an Incentive
Stock Option may be exercised only if and when the Fair Market Value exceeds the
exercise price of such Stock Option.
(f) Free Standing Rights shall be exercisable at such time or
times and subject to such terms and conditions as shall be determined by the
Administrator at or after grant; provided, that no Free Standing Right shall be
--------
exercisable during the first six months of its term, except that this limitation
shall not apply in the event of death or Disability of the recipient of the Free
Standing Right prior to the expiration of such six-month period.
(g) The term of each Free Standing Right shall be fixed by the
Administrator, but no Free Standing Right shall be exercisable more than ten
years after the date such right is granted.
(h) Upon the exercise of a Free Standing Right, a recipient
shall be entitled to receive up to, but not more than, an amount in cash or that
number of shares of Stock (or any combination of cash or shares of Stock) equal
in value to the excess of the Fair Market Value as of the date of exercise over
the price per share specified in the Free Standing Right (which price shall be
no less than 100% of the Fair Market Value on the date of grant) multiplied by
the number of shares of Stock in respect to which the right is being exercised,
with the Administrator determining the form of payment.
(i) Free Standing Rights shall be transferable only when and to
the extent that a Stock Option would be transferable under Section 5(6).
(j) In the event of the termination of employment or service of
a Participant who has been granted one or more Free Standing Rights, such rights
shall be exercisable at such time or times and subject to such terms and
conditions as shall be determined by the Administrator at or after grant.
12
<PAGE>
Section 7. Restricted Stock, Deferred Stock and Performance Shares.
(1) General. Restricted Stock, Deferred Stock or Performance Share
-------
awards may be issued either alone or in addition to other awards granted under
the Plan. The Administrator shall determine the Eligible Recipients to whom,
and the time or times at which, grants of such awards shall be made; the number
of shares to be awarded; the price, if any, to be paid by the recipient of such
awards; the Restricted Period (as defined below) and performance objectives
applicable to Performance Share or Deferred Stock awards; the date or dates on
which restrictions applicable to such Restricted Stock or Deferred Stock awards
shall lapse; and all other conditions of such awards. The Administrator may
also condition the grant of such awards upon the exercise of Stock Options, or
upon such other criteria as the Administrator may determine. The provisions of
such awards need not be the same with respect to each recipient. In the
discretion of the Administrator, loans may be made to Participants in connection
with the purchase of Restricted Stock under substantially the same terms and
conditions as provided in Section 5(5) with respect to the exercise of stock
options.
(2) Awards and Certificates. The prospective recipient of a
-----------------------
Restricted Stock, Deferred Stock or Performance Share award shall not have any
rights with respect to such award, unless and until such recipient has executed
an agreement evidencing the award (an "Award Agreement") and delivered a fully
executed copy thereof to the Company, within a period of sixty days (or such
other period as the Administrator may specify) after the award date. Except as
otherwise provided in this Section 7(2), (i) each Participant who is awarded
Restricted Stock or Performance Shares shall be issued a stock certificate in
respect of such shares of Restricted Stock or Performance Shares; and (ii) such
certificate shall be registered in the name of the Participant, and shall bear
an appropriate legend referring to the terms, conditions and restrictions
applicable to such award.
The Company may require that stock certificates evidencing Restricted
Stock or Performance Share awards be held in the custody of the Company until
the restrictions thereon shall have lapsed, and that, as a condition of any such
award, the Participant shall have delivered a stock power, endorsed in blank,
relating to the Stock covered by such award.
With respect to Deferred Stock awards, at the expiration of the
Restricted Period, stock certificates in respect of such shares of Deferred
Stock
13
<PAGE>
shall be delivered to the participant, or his legal representative, in a number
equal to the number of shares of Stock covered by such award.
(3) Restrictions and Conditions. The Restricted Stock, Deferred
---------------------------
Stock and Performance Share awards granted pursuant to this Section 7 shall be
subject to the following restrictions and conditions:
(a) Subject to the provisions of the Plan and the Award
Agreement governing such award, during such period as may be set by the
Administrator commencing on the grant date (the "Restricted Period"), the
Participant shall not be permitted to sell, transfer, pledge or assign shares of
Restricted Stock, Performance Shares or Deferred Stock; provided, that the
--------
Administrator may provide for the lapse of such restrictions in installments and
may accelerate or waive such restrictions in whole or in part based on such
factors and such circumstances as the Administrator may determine, including,
but not limited to, the attainment of certain performance related goals, the
Participant's termination of employment or service, death or Disability or the
occurrence of a "Change of Control" as defined in the Award Agreement evidencing
such award.
(b) Except as provided in Section 7 (3)(a), the Participant
shall generally have all of the rights of a stockholder with respect to shares
of Restricted Stock or Performance Shares, during the Restricted Period. The
Participant shall generally not have the rights of a stockholder with respect to
stock subject to Deferred Stock awards during the Restricted Period; provided,
--------
that dividends declared during the Restricted Period with respect to the number
of shares covered by a Deferred Stock award shall be paid to the Participant.
Certificates for shares of unrestricted Stock shall be delivered to the
Participant promptly after, and only after, the Restricted Period shall expire
without forfeiture in respect of such shares of Restricted Stock, Performance
Shares or Deferred Stock, except as the Administrator shall otherwise determine.
(c) The rights of holders of Restricted Stock, Deferred Stock
and Performance Share awards upon termination of employment or service for any
reason during the Restricted Period shall be set forth in the Award Agreement
governing such awards.
14
<PAGE>
Section 8. Amendment and Termination.
The Board may amend, alter or discontinue the Plan, but no amendment,
alteration, or discontinuation shall be made that would impair the rights of a
Participant under any award theretofore granted without such Participant's
consent, or that without the approval of the stockholders (as described below)
would:
(1) except as provided in Section 3, increase the total number of
shares of Stock reserved for the purpose of the Plan;
(2) change the class of directors, officers, employees, consultants
and advisors eligible to participate in the Plan; or
(3) extend the maximum option period under Section 5(2).
Notwithstanding the foregoing, stockholder approval under this Section
9 shall only be required at such time and under such circumstances as
stockholder approval would be required under Section 162(m) of the Code or other
applicable law, rule or regulation with respect to any material amendment to any
employee benefit plan of the Company.
The Administrator may amend the terms of any award theretofore
granted, prospectively or retroactively, but, subject to Section 3 above, no
such amendment shall impair the rights of any holder without his or her consent.
Section 9. Unfunded Status of Plan.
The Plan is intended to constitute an "unfunded" plan for incentive
compensation. With respect to any payments not yet made to a Participant by the
Company, nothing contained herein shall give any such Participant any rights
that are greater than those of a general creditor of the Company.
Section 10. General Provisions.
(1) The Administrator may require each person purchasing shares
pursuant to a Stock Option to represent to and agree with the Company in writing
that such person is acquiring the shares without a view to distribution thereof.
The
15
<PAGE>
certificates for such shares may include any legend which the Administrator
deems appropriate to reflect any restrictions on transfer.
All certificates for shares of Stock delivered under the Plan shall be
subject to such stock-transfer orders and other restrictions as the
Administrator may deem advisable under the rules, regulations, and other
requirements of the Securities and Exchange Commission, any stock exchange upon
which the Stock is then listed, and any applicable federal or state securities
law, and the Administrator may cause a legend or legends to be placed on any
such certificates to make appropriate reference to such restrictions.
(2) Nothing contained in the Plan shall prevent the Board from
adopting other or additional compensation arrangements, subject to stockholder
approval if such approval is required; and such arrangements may be either
generally applicable or applicable only in specific cases. The adoption of the
Plan shall not confer upon any officer, director, employee, consultant or
advisor of the Company any right to continued employment or service with the
Company, as the case may be, nor shall it interfere in any way with the right of
the Company to terminate the employment or service of any of its officers,
directors, employees, consultants or advisors at any time.
(3) Each Participant shall, no later than the date as of which the
value of an award first becomes includible in the gross income of the
Participant for federal income tax purposes, pay to the Company, or make
arrangements satisfactory to the Administrator regarding payment of, any
federal, state, or local taxes of any kind required by law to be withheld with
respect to the award. The obligations of the Company under the Plan shall be
conditional on the making of such payments or arrangements, and the Company
shall, to the extent permitted by law, have the right to deduct any such taxes
from any payment of any kind otherwise due to the Participant.
(4) No member of the Board or the Administrator, nor any officer or
employee of the Company acting on behalf of the Board or the Administrator,
shall be personally liable for any action, determination, or interpretation
taken or made in good faith with respect to the Plan, and all members of the
Board or the Administrator and each and any officer or employee of the Company
acting on their behalf shall, to the extent permitted by law, be fully
indemnified and protected by the Company in respect of any such action,
determination or interpretation.
16
<PAGE>
Section 11. Effective Date of Plan.
The Plan shall become effective on the Effective Date.
Section 12. Term of Plan.
No Stock Option, Stock Appreciation Right, Restricted Stock, Deferred
Stock or Performance Share award shall be granted pursuant to the Plan on or
after the tenth anniversary of the Effective Date, but awards theretofore
granted may extend beyond that date.
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR 9 MONTHS ENDING SEPTEMBER 27,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10Q FOR THE
QUARTER ENDED SEPTEMBER 27, 1998.
</LEGEND>
<CIK> 0000813856
<NAME> ???????
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> DEC-29-1997
<PERIOD-END> SEP-27-1998
<CASH> 18,787
<SECURITIES> 0
<RECEIVABLES> 6,774
<ALLOWANCES> 0
<INVENTORY> 4,196
<CURRENT-ASSETS> 33,505
<PP&E> 264,089
<DEPRECIATION> 83,742
<TOTAL-ASSETS> 274,089
<CURRENT-LIABILITIES> 101,847
<BONDS> 215,775
0
0
<COMMON> 10
<OTHER-SE> (48,098)
<TOTAL-LIABILITY-AND-EQUITY> 274,089
<SALES> 348,694
<TOTAL-REVENUES> 348,694
<CGS> 93,288
<TOTAL-COSTS> 352,351
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,937
<INCOME-PRETAX> (21,594)
<INCOME-TAX> 300
<INCOME-CONTINUING> (21,894)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,894)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
</TABLE>
